Obviously, when starting a company, the first decision you need to make is what kind of business entity you wanna have. This will have far-reaching consequences, including the ease with which you may raise capital and the amount of taxes you will have to pay.
In the recent two decades, the limited liability company’s (LLC) popularity has skyrocketed, particularly among those who run new businesses. A limited liability company may seem like the obvious choice for many business owners, but there are a number of drawbacks that owners must be aware of.
Let’s start with the basics by defining a limited liability company (LLC) before I get into the advantages and disadvantages you can encounter as the owner of one.
What Is an LLC?
Unlike sole proprietorships and general partnerships, limited liability companies (LLCs) have the legal cover of corporations with the ease of operation and tax benefits associated with partnerships. Owners of a limited liability company (LLC) are referred to as “members.” And the best thing is that there is no limit on the number of members an LLC may have, and they can be anybody from individuals to other LLCs to businesses to international organizations.
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For your better understanding, I’ll explain it with the help of an example. Let’s take a deep dive into it.
Assume that you’re the owner of a juice-making firm. For any reason, the court sues you and implies a penalty on you. If you’re an LLC company owner, you could easily protect your personal assets and shield them from others as it offers you liability protection. So, you’d suffer limited loss. Contrarily, you have to give up all your personal assets.
I’ve outlined the benefits and drawbacks of forming a limited liability company so you can determine whether it’s the best option for your new business. OK, so let’s get going.
Pros Of Trading As An LLC
For new company owners, particularly those who are still figuring out the ins and outs of self-employment, an LLC is a low-cost and low-risk solution. After looking into the advantages, you might step up to the plate and start trading your assets as an LLC. Let’s blow the lid off!
1. Limited Personal Liability
One of the greatest advantages of an LLC is that it keeps your personal assets under wraps.
The creditors and other parties seeking repayment from a limited liability company can not steal members’ cash, investments, inheritances, or houses. This aspect alone is attractive to company owners who are looking to mitigate personal risks and safeguard precious assets, since liability protection may be the difference between keeping your firm and going bankrupt.
Trading assets on your own exposes you to the risk of having your personal information, such as name, address, and phone number, published on financial websites or in newspapers. If you choose to use a limited liability company (LLC) for stock trading, the public will only know the registered agent’s details and the business address, not your own.
2. Tax Advantages
You should give careful consideration to how trading may affect your annual tax return before getting started. Since there are several deductions available to a firm that an individual taxpayer cannot claim, forming an LLC may potentially save you thousands of dollars annually. You’ll also get the option of choosing Mark-to-Market accounting. You might potentially save big bucks in taxes just by making this choice. Consider consulting a tax expert who works with traders to see whether forming an LLC would be beneficial from a financial standpoint.
3. Easy Cash Transfer
The LLC’s benefits extend beyond the realm of the law and into the realm of the wallet. One advantage of forming a limited liability company is that it makes it simpler to distribute the business’s profits to the members who own it. Rather than receiving wages, these members may instead get distributions of the company’s profits or draw from the company’s profit accounts.
4. Flexibility
The members of a limited liability company (LLC) may choose to manage the business themselves, in which case all LLC owners have a voice in the firm’s day-to-day operations, or they can hire outside management or managers to run the company (manager-managed LLC).
Managers might be internal to the organization or external. When members of an LLC lack the business management expertise necessary to operate the company effectively, they have the option of forming the company as a manager-managed firm and engaging a professional to fill this job. Keep in mind that unless you specify otherwise in your filings with the Secretary of State, many states will assume that your limited liability company is governed by its members.
5. More Credibility
When considering the benefits and drawbacks of forming a limited liability corporation, keep in mind that doing so will give your business instant legitimacy. It will include dealing with more red tape, paperwork, and responsibilities. In exchange, though, you’ll get a business structure that’s more official than either a sole proprietorship or a partnership.
Many business owners, after their venture has matured sufficiently, make the switch to an LLC in order to take advantage of the many legal safeguards and tax breaks it provides.
Cons of Trading As An LLC
No doubt that an LLC offers a lot of benefits to its members, but it has a dark side too. If you’ve decided to do trading as an LLC, I’d suggest you take a closer look at the drawbacks too, just to be aware of the disadvantages of LLC.
Before the time’s up, let’s explore the negative aspects of trading as an LLC:
1. Losses
Since the corporation is treated as a distinct legal entity, any losses incurred by it may only be deducted from the profits it has earned in the past or will make in the future. This might be a major drawback, particularly in the beginning stages of the company when losses are more likely to occur.
In contrast, the losses incurred by a partnership or single proprietor in the first years can be adjusted against other revenue in the current and past years.
2. Withdrawal of Money
Many entrepreneurs forget that their personal funds are entirely distinct from the funds of their limited liability company. And if you don’t file your taxes properly, the government might hit you with a hefty penalty.
There will often be no tax consequences for a single proprietor or partnership when adding or removing funds from the firm.
3. Costs
Only those costs that are completely, solely, and necessarily incurred while acting in your capacity as a director of the firm may be deducted from your taxable income.
You’d definitely prefer to do belt tightening in your trading business, therefore, you’ve to keep in mind that operating as a limited company may incur additional costs due to the extra paperwork involved and these expenses are generally more than covered by the tax benefits. Hiring a local registered agent is also something that would cost $100/year.
4. Fewer Potential Investments
Take into consideration the availability of funding options while weighing the benefits and drawbacks of founding an LLC. Even while limited liability corporations (LLCs) have a variety of investment opportunities available to them, including equity financing, debt financing, fundraising, and crowdsourcing, they cannot rely on the support of the financial community.
Due to the fact that an LLC cannot issue shares as a corporation may, the only method for a private or angel investor to make a financial contribution is to join the LLC and become a co-owner. You would assume this is the same as selling shares, but in reality, it can have a profound impact on how your business operates and the decisions that are made.
5. Upkeep and Formalities
While the necessary paperwork to form an LLC may be minimally onerous, keeping it operational might be a different story. LLC members may need to file yearly reports with the relevant authorities in order to maintain their business operations in certain states. Moreover, these studies generally come with costs and tedious documentation.
In addition, when you establish an LLC, you must be cautious to keep your business and personal finances completely separate (including using different bank accounts). This is because LLC profits are taxed through the owner’s personal income tax return.
