The way you choose to legally structure your business impacts how you’ll receive income, how decisions are made, and how you pay taxes.
There are several business entities to choose from, how do you know that an LLC is right for you? Keep reading for a more in-depth look at the advantages and disadvantages of forming an LLC.
What is an LLC?
The formal definition of an LLC is: a limited liability company (LLC) is a business structure in the United States whereby the owners are not personally liable for the company's debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship
In general terms, an LLC is a process you take when you want to turn your freelancing or small business idea into a legal business entity. In Texas, there’s a one-time fee of $300, optional fees, and annual reports associated with forming an LLC.
What are the Advantages of Forming an LLC in Texas?
One of main reasons business owners form an LLC is to obtain the personal liability protection. While this is a major benefit, there are many other advantages to note as well.
Limited Personal Liability
When you properly form an LLC in Texas, you’re protected from the liabilities and creditors – and that’s why most people form an LLC.
As with any business entity, you can deduct or write off your legitimate business expenses from your LLC’s income. This can significantly lower the profits reported to the IRS and help you in the long run.
Texas is known for giving LLC members freedom to customize their LLC dwellings. This means two things: An LLC can elect management flexibility and choose tax flexibility because the LLC itself doesn’t pay federal income taxes in the state of Texas.
When forming an LLC in Texas, there are several ways to protect your privacy and separate your personal and professional life. The forms that you fill out will help you maintain confidentiality.
Other business entities, such as a sole proprietorship, cannot survive when the owner(s) pass away. LLCs have the capability of surviving and thriving in the event of death or other major life events as long as the paperwork is filed correctly.
What are Some Disadvantages?
Limited personal liability, tax advantages, and flexibility are all advantages that draw business owners in to forming an LLC. However, there are some disadvantages to take into consideration.
If you’re a small business or freelancer just getting started, things can get pricey in the beginning. Texas does have a higher startup fee but does not have the requirements that many other states have.
Riskier Than Corporations
Investors and lenders often consider LLCs a bigger risk than corporations. This could hurt your chances of getting loans accepted and growing your business.
Harder to Raise Capital
When you register your business, you should have enough capital to get it started, but keep in mind that LLCs can’t issue shares. When it comes to raising capital, business owners must get creative because growing your capital could get tricky!
Who Should Start an LLC?
Among the many decisions business owners must make, one of the most important is whether to form an LLC or an S corporation (S Corp).
LLCs are best for owners who want to have an unlimited number and type of owners and want a more flexible legal environment. For example, S Corps are subject to mandatory requirements whereas LLCs in Texas have optional requirements.
LLCs are often best for small businesses, entrepreneurs, and those that are self-employed. However, most business are allowed to for a Limited Liability Company. According to the legal website LawInfo, an LLC must exist as a for-profit business; non-profit organizations cannot operate as an LLC.
Professionals such as lawyers and doctors are also not allowed to operate under LLCs due to the risks they take every day.
Your business is most likely to benefit from being an LLC if:
You have co-owners or employees. Without an LLC, your personal assets are at risk if your business is sued for something a co-owner or employee does.
Your business has significant risks. Some types of businesses are at high risk for failure, have both financial and liability risks.
Should You Hire a Lawyer to Start an LLC in Texas?
There are many benefits to working with a lawyer that you may want to consider.
Owners of a Texas LLC are protected from liabilities and creditors as long as the LLC is properly formed with the right documentation and operated accurately. In addition, lawyers provide written guidance on how to operate the LLC correctly so that the liability protection is not compromised.
A business lawyer can also save you time and money, and handle the items you may not have considers, such as:
- Creating an LLC operating agreement
- Creating articles of organization that list the registered agent, LLC management, and the date of formation
- Keeping detailed records in case of audits and/or lawsuits
- Filing fees
- Registering your business name
- Completing and filing all legal documents
Choosing to form an LLC is a decision that you’ll have to make based on your unique situation. Taking these advantages and disadvantages into consideration gives you a more comprehensive overview of what this business decision entails.