When deciding what structure you want your business to fall under, you should give equal weight to the benefits and potential drawbacks that each type can potentially bring to your table.
Limited liability companies (LLCs) prove an ever-popular option, especially for newcomers to the business world. This serves as a good place to start.
Benefits of an LLC
Nerd Wallet takes a look at both the pros and cons of an LLC. In terms of benefits, the most obvious one is right in the name: limited liability. In short, your personal and business finances have a stark division between the two. In other words, if your business goes under and you have to file for bankruptcy, it does not involve any of your personal assets like your personal savings account, your house, and so on.
It also has a lot of flexibility, unlike corporations. Management is flexible, the way you want to run things stays flexible, and you do not have as many requirements such as monthly meetings.
On top of that, it is relatively easy to start up. There is not much paperwork or initial fees right off the bat. The upkeep is relatively simple as well, which is good news for those who do not like complexity.
Drawbacks of an LLC
However, there are downsides to consider, too. For one, you have to deal with self-employment tax. This can range up to enormous amounts depending on the success of your business.
You also have limitations within the limited liability. A judge can rule that your structure actually does not protect your personal assets in an act called “piercing the corporate veil”. This can happen if you do not clearly separate business and personal transactions, or if you run the company in a fraudulent way. These are important things to keep in mind.