Advantages and disadvantages to creating an LLC

On Behalf of | Apr 5, 2022 | Uncategorized |

If you are starting your own business in Michigan, one of your steps will be to choose a business structure that is appropriate for your business. One potential business structure for you to consider is the limited liability company, or LLC. Before you make your choice, you may review your options with an attorney and determine what type of structure suits you the best.

Advantages to LLC

There are many advantages to structuring your business as an LLC. With an LLC, you will have:

  • Easy to start and maintain: Starting and maintaining an LLC requires little paperwork and fees are minimal.
  • Unlimited members: There is no limit to the number of owners/members an LLC can have. All members are also allowed to participate in decision-making on a regular basis.
  • Limited personal liability: As a member, you will not be held personally liable for debts owed by the company. For example, creditors will not be able to come after your house or personal bank account to pay off business debts.
  • Pass-through taxation: Unless you choose another option, an LLC’s profits go directly to members without being taxed first. You will pay tax on the profits on your personal federal income tax returns, making your taxes much easier to file.

Disadvantages to LLC

While there are many advantages to an LLC, there are also a few disadvantages. With LLCs, you should be aware of the following:

  • Piercing the corporate veil: If your LLC does not protect your personal assets (e.g., you combine business and personal transactions), you may have pierced the corporate veil and may now be personally liable for business debts.
  • Self-employment tax: LLCs are taxed as partnerships, unless you choose to be taxed as a corporation. Therefore, members are usually faced with a self-employment tax.
  • Difficult to continue if member leaves: If one member leaves an LLC, the remaining members will have to dissolve the original LLC and create a new one if they want to continue with the business.

If you think an LLC is right for you, your business law attorney will help ensure that you do not skip any important steps in the formation process.