Advantages and Disadvantages of an LLC
Whenever someone’s decides to form a business, one of the very critical decisions will be what business entity to form. There are many entities ranging from a Corporation, S Corp, LLC, general partnership, limited partnership and others. However, being a business owner and knowing which business entity to form could be a very confusing question. This blog is going to tell you the advantages and disadvantages of an LLC here in Texas.
Advantages of an LLC
Liability protection
One of the biggest perks of having an LLC is that you are protected from liability if something were to happen. Only the LLC is liable for debts and liabilities. When you form an LLC, the LLC essentially becomes its own person therefor if somebody wants to sue you, they must sue the company instead. So, let’s assume an LLC accumulates debt and the creditor wants to sue you. They cannot sue the business owner, only the LLC itself. This protects your personal assets from being at risk.
Flow through taxation
With tax laws changing very often one of the perks of having an LLC is you deal with what’s called pass through taxation. What this means is that the LLC itself will not be taxed, it’ll essentially flow right through the business to the individuals who will be taxed at their normal personal income level. Let’s pretend I own and am the only employee of company ABC LLC. ABC LLC, makes $100 a year but because of pass through taxation the company won’t get taxed on those hundred dollars. Instead it will flow through to me, its only employee, and I will be taxed on those 100$ at my personal income level. This is beneficial to the business owner because the owner only must pay taxes on the profit he makes from the business. If he pays employee salaries, the employees pay their own tax, not the business.
Disadvantages of an LLC
Self-Employment Taxes
When you are an LLC, because of the flow through taxation, the individual is responsible for paying the self-employment taxes. Regularly when one works for a corporation, the business withholds your Medicare and social security tax from your paycheck. With an LLC, none is withheld which usually leaves you having to pay the self-employment taxes at the end of the year. It is very important to plan for this so that you don’t get stuck with a large tax bill at the end of the year you didn’t expect.
Filing with the Secretary of State
This isn’t a disadvantage but is required to form an LLC. You must register the business entity with the Secretary of State and make sure all your filings and documents are in order and valid.
If you are considering opening a business in Texas, feel free to reach out to Zavala Texas Law to speak with one of our small business attorneys. They can help you get started and make sure you run your business effective and within the rules.
