Limited Liability Company Advantages & Disadvantages:
When forming a business, the entrepreneur is typically faced with the decision of whether to incorporate. A popular method of incorporation for small businesses is to form a limited liability company. According to the Entrepreneur website, the LLC is a favored choice for businesses with one to three owners not looking to build the business into a much larger company. The LLC offers possible advantages and disadvantages.
As its name implies, a limited liability company offers protection for the owner against a possible lawsuit. Unlike a sole proprietorship where the owner&#039;s personal assets may be at risk, the owner of an LLC is considered separate entity from the company. Therefore, creditors cannot seize the owner&#039;s personal assets such as a home or car to satisfy a judgment against his business.
Owners of a typical corporation, such as a C corporation, must pay taxes on profits at the personal and corporate levels. With the LLC, any profits earned are taxable only at the corporate level. Therefore, owners of the corporation only pay taxes on profits on their personal income tax returns.
Health Insurance Premium Deduction
A problem many entrepreneurs face is finding affordable health insurance. An LLC can offer the advantages of deducting health insurance premiums on an income tax return. According to Gaebler.com, the managing member of the LLC can deduct 100 percent of her health insurance premiums, up to her pro-rata share of the corporation&#039;s net profits.
Taxable Non-Distributed Profits
A disadvantage of the LLC format is that all members of the corporation must pay taxes on corporate profits, even if they do not share in the distribution, according to the Entrepreneur website. This means that if a member decided not to pull profits out during a given year, he is still liable for taxes on the amount.
Members of the LLC are not permitted to pay themselves a wage. Instead, any money taken out is done so in the form of profit distribution. Thus, members may be forced to take distributions if they have no other form of income. And as mentioned in the previous section, if they leave the profits in, they&#039;re still required to pay taxes.
Managing members of the LLC do not avoid paying the self-employment tax. Any profits earned by the LLC are considered to be earned income. As a result, the self-employment tax still applies to the bottom line.