Entrepreneurs in Oregon and around the country have traditionally formed corporations to limit their liability and protect their personal assets, but limited liability companies have become extremely popular in recent years. An LLC provides the same asset protection as a corporation, but it also offers its members a number of tax benefits. LLCs have “members” rather than “shareholders”, and they can be other businesses as well as individuals. There are many advantages to forming an LLC, but there are also a few drawbacks to consider.
Pros of forming an LLC
Asset protection is the most often cited benefit of forming an LLC. When an LLC is sued or pursued by debt collectors, its members do not have to worry about losing their homes, automobiles or other personal assets. The profits generated by an LLC are, absent a contrary election, treated like the profits of an S corporation by the Internal Revenue Service, which means they are passed through to its members instead of being taxed at the corporate level. Members can also deduct LLC losses on their personal tax returns.
Cons of forming an LLC
While LLCs are more flexible than corporations and usually easier to set up, they do have a few disadvantages. The asset protection they provide may not be robust enough to withstand a business lawsuit made by a party that suffered harm because an LLC was mismanaged, and members are required to pay Social Security and Medicare taxes on all of an LLC’s profits if they choose to be taxed as a partnership. Many states also have specific regulations for LLCs. In Oregon, all LLCs authorized to conduct business are required to submit an annual report with the secretary of state and pay a fee.
Choosing the right business entity
Sole proprietorships, partnerships, LLCs and corporations all have their advantages and disadvantages, so entrepreneurs should think carefully before choosing the appropriate legal structure for their commercial ventures. LLCs seem to offer the benefits of a corporation with less paperwork and complexity, but they are not suitable for every business.