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LLC: advantages & disadvantages

If you are an entrepreneur starting a new business, there are many ways that you and your partners can proceed. In the oil and gas industry, partnerships are popular largely because they are easy to form. If you are a solo service provider, you may operate on your own as a single proprietor.

For most start-ups, however, the limited liability corporation (LLC) is the most common choice. As an arrangement it has great advantages. But it is important to be aware of the potential disadvantages of the LLC before making a final decision.

The advantages of an LLC

Unlike a partnership, an LLC is a separate legal entity and not tied directly to its owners. This separation between the owners of the company carries with it many great advantages, including:

  • Liability for all debts is held by the company itself, protecting the shareholders.
  • Similarly, shareholders are shielded from liability from all lawsuits.
  • The LLC is a flexible structure which can change and grow along with the business.
  • Creation of an LLC is simple, requiring only registration with the Texas Secretary of State.

These advantages, particularly the liability shielding, make the LLC a choice for many entrepreneurs starting a new business across Texas.

The disadvantages of an LLC

There are only a few disadvantages of an LLC, but most of them are a mirror of the advantages above. With the right advice and understanding of the corporate structure they can be worked through with an appropriate agreement, however.

One disadvantage is that as a distinct legal entity it can be difficult to raise start-up capital. The business which you create will have no credit history. It can be difficult to secure lines of credit without selling off shares of the profits as equity.

Taxes can be complex as well. The LLC is a “pass through” to your personal income tax, which may be at a higher rate than corporate taxes. All business profits are potentially vulnerable to the self-employment tax, too.

Lastly, it is critically important that the operating agreement spells out the roles, ownership stakes, and responsibilities of everyone in the LLC. The ease with which an LLC can be formed makes it far too easy to skip the important step of structuring it in a way that makes sense for the business and its operation.

Seek solid advice

As with all business formation the key to maximizing the advantages of your LLC and minimizing the disadvantages is expert consultation. It is critical that you seek out an attorney with experience in business formation in order to have your start-up running optimally from day one.

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