The following section outlines the advantages and disadvantages of an LLC in comparison
to a sole proprietorship and partnership.
Advantages of an LLC compared to a sole proprietorship and a partnership
Owners are not personally responsible for company debts.
This is the most important attribute of an LLC. In a sole proprietorship
and partnership, the owners are personally responsible for business debts. If the
assets of the sole proprietorship or partnership cannot satisfy the debt, creditors
can go after each owner's personal bank account, house, etc., to make up the difference.
By contrast, if an LLC runs out of funds, the owners are usually not liable.
Please note that under certain circumstances, an individual member may be liable
for the debts of an LLC. These circumstances include:
- If a member personally guarantees a debt.
- If personal funds are intermingled with LLC funds.
- If the LLC has minimal capitalization or insurance.
- If the LLC fails to pay state taxes or otherwise violates state law (like
Easier for an LLC to raise money.
An LLC has many avenues to raise capital. It can admit new members by selling
membership interests, and it can create new classes of membership interests with
different voting or profit characteristics. Plus, investors will be assured that
they are not personally liable for company debts.
Ease of ownership transfer.
Ownership interests in a limited liability company may generally be sold
to third parties without disturbing the continued operation of the business. The
business of a sole proprietorship or partnership, on the other hand, cannot be sold
whole. Instead, each of its assets, licenses and permits must be individually transferred.
New bank accounts and tax identification numbers are also required.
Disadvantages of an LLC compared to a sole proprietorship and
Cost of set up.
LLCs cost more to set up and run than a sole proprietorship or partnership.
For example, there are the initial formation fees, filing fees and annual state
fees. These costs are partially offset by lower insurance costs.
Although an LLC requires fewer formalities than a corporation, there is
still more paperwork involved than a sole proprietorship or partnership. A sole
proprietorship or partnership can open and operate without any formal organizing
procedures - not even a handwritten agreement.
In order to maintain the separate form of the LLC and maintain the liability
protection of its members, LLC owners must carefully maintain separate records and
keep personal affairs separate from the LLC's business. Even more importantly, the
LLC's money should never be intermingled with personal money.
To learn more and speak with a representative, please call us at (888) 381-8758.