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Pros and Cons of the LLC Model

Want to form an LLC? Before you make your decision, consider the tax benefits--as well as the disadvantages.
July 21, 2003
URL: http://www.entrepreneur.com/article/63388

Q: I'm starting a business with two other individuals. We are in the process of selecting a business structure. We've heard there are some advantages to the LLC structure. Is this something we should consider?

A: A limited liability company, or LLC, is a relatively new form of business organization that is certainly worth consideration. It has several features that create favorable tax treatments, as well as protection from personal liability. Since the status of the LLC form of organization varies somewhat from state to state, be certain to find out how your state's law applies.

The LLC allows for multiple owners, or members, who enjoy limited liability, as well as a managing member, who also enjoys limited liability and typically is the person responsible for managing the business. The profits or losses of the business pass directly through to the owner's personal income tax return, Form 1040. The LLC files a Form 1065, and then lists each member's taxable profit on Form K-1. The bottom-line profit of the business is not considered to be earned income to the members, and therefore is not subject to self-employment tax.

The following are advantages of the LLC form of business organization:

Some of the disadvantages of an LLC are:

Note: The information in this column is provided by the author, not Entrepreneur.com. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.


David Meier is the founder and COO of Business Development Coaching, a company that provides small-business owners with ongoing business coaching.