To LLC Or Not To LLC?

Why Not?

And now for the downsides:

No stock. LLCs are tough if you have several investors or raise public money, since you don't have shares or stock certificates to offer. If you give a percentage of ownership to outside investors, you must decide whether they're managing members. Seidel cautions entrepreneurs: "Ask yourself if you need more flexibility in terms of corporate stock ownership, financing options, etc. If so, the LLC is probably not a good idea--try a C corporation."

Two's a crowd. LLCs in most states require only one member: you. But if you live in Massachusetts or the District of Columbia, you must have two members, and that could be a deal-buster.

Fewer incentives. LLCs aren't ideal if you want to give fringe benefits to yourself or employees. Unlike with a C corporation, you can't deduct the cost of benefits with an LLC. And since there's no stock, you can't use stock options as incentives for your employees.

Paperwork. LLCs file articles of organization with the State Corporation Commission or Secretary of State and draft an operating agreement listing members' rights and responsibilities. Some, like an application for employer ID number (IRS Form SS-4) and choice of tax status (IRS Form 8832), are one-shot; others (annual report, quarterly withholding and tax deposit coupons, and business bank account) are ongoing. While it's not an impossible burden, there's more paperwork than if you're a sole proprietor.

Taxes. LLC members pay self-employment taxes, the Medicare/Social Security tax paid by entrepreneurs; it's calculated on 15.3 percent of profits. Contrast this with an S corporation: Self-employment tax is due on salary only, not your entire profits. You're caught in the self-employment tax net if: 1) you participate in the business for more than 500 hours during the LLC tax year; 2) you work in a professional services LLC (health, law, engineering); or 3) if you can sign contracts on behalf of the LLC.

Ultimately, the LLC decision is one you won't want to make alone. "Get advice from a specialist about the ideal corporate form to take," advises Seidel. "It can make a huge difference later on." In business, as in life, one size rarely fits all.


Joan E. Lisante is an attorney and freelance writer who frequently writes about business issues.

« Previous 1 2 Page 3

Like this article? Get this issue right now on iPad, Nook or Kindle Fire.

This article was originally published in the February 2001 print edition of Entrepreneur with the headline: To LLC Or Not To LLC?.

Loading the player ...

5 Secrets for Making Your Logo Stand Out

Ads by Google

Share Your Thoughts

Most Shared Stories

1
5 Social-Media Tips to Enhance Your Marketing
2
Richard Branson's 5 Steps for Startup Success
3
9 Things Rich People Do Differently Every Day
4
10 Quotes on Persistence to Help You Keep Going
5
15 Signs You're an Entrepreneur