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Pro’s and Con’s of Becoming an LLC

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Here’s this month’s guest article for our Commercial Customers from our friends at SCORE Cape Cod.

Should I Be an LLC?

You start out as a Sole Proprietorship—it’s easy, it’s cheap and it’s effective. Just apply through your town and that’s it.  No wonder it’s the favorite of startups everywhere.  Over time though, it makes sense to relook at your business structure and decide if being a Sole Prop is still the best option for you.

When you are a Sole Prop, you and your business are not separated for tax or liability purposes, meaning all business income passes through to become part of the owner’s income. Importantly, if you (or a partner) are sued the other party can come after your personal assets.  Nothing is protected and on top of that, you may be paying more in taxes than is necessary.

That’s why we find that many of our SCORE clients switch to be an LLC as their business grows and they determine there is more at risk.  The good news: you can change your business structure at any point in your company’s lifespan.

Like anything, there are pros and cons of being an LLC.

The Pros

  1. It’s flexible—you can be a sole owner, a general partnership (everyone shares everything equally) or a limited partnership (one owner controls operations and the other contributes and receives part of the profits). The number of members in an LLC is totally flexible.
  2. You are protected from losing personal assets. Unlike a Sole Prop the owner is not personally responsible for business debts and liabilities.
  3. You may be able to pay less in taxes. One of the interesting things about being an LLC is that you are able to either pass the business income over to your personal account as you do with a Sole Prop potentially paying a higher tax rate or you can file as an S-Corp (without being incorporated) and potentially pay a lower amount.  The tax implications are different for every business so discuss this with your Accountant to find out what’s best for you.
  4. Credibility—in some industries, being an LLC brings credibility as potential clients and vendors perceive you to be more capable and professional.
  5. You can deduct some health insurance costs. Check with your Accountant to deduct the cost of medical insurance for employees who are not members of the LLC. If you set up the LLC to run and be taxed as an S Corp, the owners can take personal income tax deductions on premiums that are paid. If you’re a single-member LLC you can deduct the cost of your individual health insurance. All worth looking into.
  6. Deduct your losses: should your LLC lose money any year that loss can be deducted against your personal income (again, check with your accountant). One other good note is that should you have a loss it will not affect your personal credit score.

The Cons

  1. It’s not cheap. Probably the most noted Con to an LLC is the annual payment to the state of $500.  Unlike a Sole Prop, you need to renew your LLC annually with the state.
  2. Profits are subject to Social Security and Medicare taxes which sometimes can be significant.
  3. Ownership can be more difficult to transfer, pending how everything was set up initially in the Articles of Organization.

Another option is to become an S-Corp, often done for the potential tax advantages. Like an LLC, an S-Corp also require an annual fee. The biggest difference is that it’s more formal–requires a Board of Directors, stricter state rules and regulations, etc.  Many Cape businesses find that being an LLC works well as they have the protections of an LLC and the option to file their taxes as an S-Corp and potentially save money.

Should you decide to change your business structure, you’ll do it through the state so start by checking out information on the website for the Massachusetts Secretary of State https://www.sec.state.ma.us/cor/coridx.htm. Filing the application online is relatively simple—we have many clients that consult first with a SCORE mentor and then complete the application themselves.  However, if you don’t feel comfortable use an online site like Legal Zoom, Nolo or RocketLawyer or hire a local lawyer to help you out.  The important part is that you have taken the time to look at your structure and ensured that it’s still working well for you.

Need help with this or other questions?  SCORE Cape Cod & the Islands provides free, confidential mentoring.  Contact us at capecodscore @verizon.net, at 508-775-4884 or on our website at www.capecod.score.org