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Pros and cons of a limited liability company

On Behalf of | Sep 15, 2017 | Business Formation & Planning

Business owners in New York who are debating on the best formation for their company should know the advantages and disadvantages of a limited liability company. A popular formation, an LLC is a great choice for many business owners, but it comes with some drawbacks.

According to the Small Business Association, a limited liability company has advantages that are found in both partnership and corporate business structures. With an LLC, personal assets are off-limits in the case of lawsuits or bankruptcies. This means that the owners’ houses, personal bank accounts, vehicles and other items of value are protected. Any loss or profit that the business has is also protected from corporate taxes, so the owners do not have to face double-taxation.

According to the Chronicle, an LLC is also beneficial in that health insurance premiums can be deducted on the owner’s tax return. However, there are a number of disadvantages that people should be aware of. One is that owners are responsible for paying self-employment taxes, which go towards Social Security and Medicare and can be steep. Also, members are not allowed wages, and any amount that is taken out is considered to be profit distribution. Whether the profit is distributed or kept in the business, members are required to pay taxes on the total.

An LLC is a good choice for small companies made up of one to three owners who have a number of personal assets they want to keep protected. It also has a lower tax rate than the corporation structure, which is advantageous for a number of business owners.