Pros and Cons of an LLC
The decision as to whether or not to organize as a Limited Liability Company, or LLC, is important. Some of the key pros and cons are described below, but you may want to consult an attorney to understand how they apply to your specific situation.
Protection of personal assets
A properly formed and maintained LLC will shield the owners’ personal assets from the LLC’s liabilities. This protection arises because, in the eyes of the law, an LLC is a separate, distinct entity.
To illustrate, George and Laura decide to start a trucking company. They both have homes and savings accounts. To start the company they form an LLC and invest $20,000 each. They purchase a truck and hire a trucker. The trucker, while texting Laura about a shipment, gets into a car accident, severely injuring the driver of the other car. The LLC gets sued, and unfortunately the damages are significantly larger than the insurance policy they carried. The LLC, and all its assets, including the truck and what is left over of the $20,000 George and Laura each invested, will be on the hook for the injuries sustained by the driver. However, George and Laura’s personal assets, such as their homes and savings accounts, won’t be on the line. In other words, George and Laura will lose their initial and any subsequent investments, and all the time they put into the company, but all their other assets are protected.
Election of tax status
An LLC can elect to be taxed as a disregarded entity (one member), a partnership (more than one member), a corporation, or an s-corporation. This flexibility is highly beneficial.
Flexibility of agreement
The operating agreement allows the profits and losses to be split among the members in any way the members decide. This is in contrast to a corporation, where stock ownership dictates the share of profit and loss owners receive.
An LLC can exist in perpetuity. This is an advantage over a partnership or sole proprietorship, which cease to exist on the death of the owner.
There are costs involved in starting an LLC, including organization costs, and the time and/or legal fees involved in preparing the documents you need. There are also ongoing extra accounting costs for maintaining the LLC.
Generally investors are more comfortable investing in a corporation; however, this is becoming less and less true as time passes and investors become more comfortable with membership interests.
California $800 Franchise Tax
California charges $800 a year to keep your LLC active.