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The Benefits And Drawbacks Of Forming An LLC

One of the first critical decisions that a business owner needs to make centers on entity selection. Based on the goals of the new organization and the level of legal protection needed, there are numerous options available. From corporations (such as C and S corporations) to an LLC (limited liability company) to a partnership, a number of considerations go into the choice of entity.

A recent piece in Forbes noted that an LLC is generally the most popular entity selection, but there are benefits and drawbacks to this choice.

Early-stage businesses can be risky for numerous reasons. One entity that offers protection is the LLC. Based on the specific situation and unique goals, this entity offers benefits such as:

  • Less paperwork and procedures: A key reason for the creation of the LLC was to make the process for business owners less time-consuming. While the paperwork is less burdensome, it is recommended that you take the time to develop comprehensive operational documents centered on dispute avoidance such as the allocation of profits and losses, compensation, and the different levels of authority.
  • Taxes: As a “pass through entity,” an LLC provides numerous tax options business owners might find beneficial. For all intents and purposes, filing a tax return as a single-member LLC is a fairly straightforward process. Additionally, a business owner might be able to deduct losses against other income.
  • Limited liability: For many people, this represents the biggest single attraction of an LLC. While the protection is not absolute, through an LLC a business owner can protect his or her personal assets in the event of litigation or bankruptcy.
  • Are There Drawbacks To Selecting An LLC As An Entity?

While having a business formation attorney review your situation is ideal, it is wise to understand an LLC’s limitations early on in the process. For example, an LLC can make it difficult to secure funding through venture capitalists. Many business owners who intend to raise substantial amounts of capital through this method often choose a C-Corp during the entity selection process.

Take the time to consider your options and make the correct decision for the future of your business.

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Frisco, TX 75034

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Plunk Smith, PLLC
Plunk Smith, PLLC