The Pros And Cons Of A Domestic Limited Liability Company

A limited liability company (LLC) is a business structure you can choose to adopt as an entrepreneur. The other structures include sole proprietorships, partnerships, and corporations. Each of these structures has advantages and disadvantages. As the name suggests, an LLC limits the extent of liability its owners can face in the event the business incurs liabilities and legal obligations. This is because setting up your business as an LLC gives it a distinct and separate personality under the law. In other words, you and your LLC business will be two separate legal entities.

There are two types of LLCs; a general and a domestic LLC. With a general LLC, you can file for registration anywhere, regardless of where you’ll run your business. On the other hand, you must register your domestic LLC in the state where you plan to run your operations. Either option is ideal, depending on the circumstances and needs of your business. If you’re still unsure which type you should go with, learning the pros and cons can help you decide.

Pros Of Choosing The LLC Structure

Limited Liability

When you own a business, you will have to deal with multiple transactions and even take out loans to expand operations or keep it afloat. If you don’t register your business as an LLC, creditors can get hold of your assets and liquidate them in the event your business fails to meet obligations. Setting up your business as an LLC, however, allows you to enjoy limited liability. This means your personal assets won’t be at risk for the debts and liabilities incurred by the business.

If you take steps to starting an LLC in Arizona, you can protect your home, savings, and other personal assets from unwanted business risks. However, do keep in mind that this advantage is not absolute. Under special circumstances, the court may ‘pierce the corporate veil’ and allow creditors to go after the owner’s personal assets. This usually happens when the court finds that the LLC was simply created as a front to defraud unsuspecting parties.

Multiple Business Partners

A domestic LLC allows you to choose the number of partners you want in your business. You can run it individually or have a white label partner. Of course, having many business partners can be advantageous if you’re looking to raise more capital to run your operations. With more partners, your LLC can have access to multiple resources and a larger professional network. However, if you choose to have multiple business partners, writing and agreeing on how to run the business is important. The lack of such an agreement can bring about many conflicts that hinder the growth and success of the business.

Flexibility In Management

A company’s management system greatly determines its success. Bad management practices can bring a company to ruin. That’s why management is an important factor to consider when choosing a business structure to adopt. A domestic LLC gives you flexible management options. You can decide to use members of the LLC to manage operations. It’d be your choice if you prefer business secrets to remain within the members. Alternatively, you can hire non-members to run your operations. This option is ideal if you want experts to manage operations and none of your members have the expertise to do so.

Cons Of Choosing The LLC Structure

Individual Tax Filing

As mentioned earlier, an LLC gives your business a separate and distinct personality, allowing your assets to be protected from corporate and financial risks or liabilities. However, when it comes to filing taxes, you still have to file under the individual category because LLCs are classified under self-employment. In addition to filing individual returns, members of the LLC must pay for Medicare and the company’s social security taxes. The combination of the three is often expensive, making it disadvantageous.

Disruption Of Operations

As a business, you hope operations will run as usual from day one, even as you grow over time. There’s a form of consistency you expect. However, a domestic LLC eliminates this operational efficiency and excellence. With an LLC, should any member die, leave, or declare themselves bankrupt, you have to dissolve the limited liability company. You have to start from scratch, considering you can’t transfer shares from the old LLC to the new one. These issues often arise when you have many partners. There’s a high likelihood of members leaving the LLC over time, bringing about instability in operations.

No Shares Of Stock

For most businesses, you’ll find the owners having a given percentage of shares, which depicts the percentage of their ownership in the business. These shares of stocks can also be bought, sold, or redeemed. However, a domestic LLC cannot issue shares of stocks as corporations can. This can be disadvantageous for partners and investors. As a member, you can only benefit through profit-sharing. The discussion above has laid out the pros and cons of an LLC structure. Hopefully, the points above have given you insights that can help you arrive at an informed decision regarding the ideal structure for your business.