Why do investors not like LLCs?
One is because an LLC is taxed as a partnership (pass-through taxation) and will complicate an investor's personal tax situation. By becoming a member of the LLC to invest in it, the investor will be taxed on the LLC's profits even if receiving no cash distribution personally.
The LLC carries liability and anything outside is not. Now one of the reasons why you may want to consider not setting up an LLC right away is because of the startup costs as a new business owner. Typically you have startup costs and organizational costs to get your business going.
Investors prefer C corporations over S corporations and LLCs because shares in a C corp are freely transferable. By design, C corps have a well-established, standard framework for the issuance and distribution of equity (stock and stock options).
LLCs Can Complicate Investor Tax Situations
Investors frequently do not want to complicate their personal tax situation by becoming a member in an entity taxed as a partnership, and LLCs are most frequently taxed as partnerships.
LLCs may also qualify for business loans from banks and credit unions. Typically, venture capitalists (and sometimes angel investors) will not fund LLCs. There are several reasons for this. One is because an LLC is taxed as a partnership (pass-through taxation) and will complicate an investor's personal tax situation.
The Bottom Line. LLCs are a good combination of protection with flexibility and tax benefits. It provides an array of taxation alternatives while shielding individual members from personal liability.
Thus, venture capital firms and angel investors (any investor looking for equity in exchange for their money) will prefer to invest in a C-corp, making things on their end much more organized. In some cases, it's too difficult to even invest in a company that isn't a C-corp.
The management flexibility, tax benefits and protection of personal assets offered by LLCs make it a great vehicle for investment opportunities. Since there can be more than one member, it's often the business entity of choice when multiple people are looking to invest in something as a group.
Advantages of LLCs over S corporations. One of the reasons many people prefer the LLC over the corporation is that there is more flexibility in how it is managed. Corporation laws (which, as noted apply equally to S corps and C corps) contain more provisions regarding managing the company than LLC laws.
One of the biggest tax advantages of a limited liability company is the ability to avoid double taxation. The Internal Revenue Service (IRS) considers LLCs as “pass-through entities.” Unlike C-Corporations, LLC owners don't have to pay corporate federal income taxes.
What are three things that LLCs are not required to do?
LLCs are not required to do three things: hold annual meetings, keep minutes, or file written resolutions. When it comes to operating flexibility, Limited Liability Companies (LLCs) enjoy certain advantages over other business structures.
An LLC Can Protect Your Personal Assets From Liability
Most importantly, all of those areas are considered to be separate from you personally. This means if another business or individual has an issue with your side hustle, then any action they take will be against the LLC and not you and your personal assets.
Because an LLC is a separate entity, the owners of the company have limited liability. This is one of the most important benefits to operating as a limited liability company. Limited liability means that the individual assets of LLC members cannot be used to satisfy the LLC's debts and obligations.
However, C-corps may offer more tax benefits in the long run. While LLCs are pass-through entities where profits and losses pass to the owners' personal returns, C-corps allow business losses to offset income earned. C-corps can also potentially qualify for more business tax deductions.
LLC registration may be a bit cheaper than S Corp registration. It also typically requires slightly less annual paperwork. But S Corp owners may be able to save more than enough on self-employment taxes to make up the difference.
All corporations are required to file a corporate tax return, even if they do not have any income. If an LLC has elected to be treated as a corporation for tax purposes, it must file a federal income tax return even if the LLC did not engage in any business during the year.
The private limited legal structure is most commonly used for the incorporation of a company. It is preferred because this structure keeps the liability of the members limited to their share in the capital.
However, raising or obtaining external capital for LLCs can be done through the offer of equity or debt. An individual or entity has LLC equity when they buy an ownership percentage of the company, which entitles them to a certain amount of the profits, and thus they can contribute to decision-making.
There are many good reasons to form an LLC, including the flexibility of choosing a single member LLC, ensuring privacy through an anonymous LLC, drafting a comprehensive operating agreement, understanding the requirements, managing taxes, and preparing for the annual report.
You don't need an LLC or any formal business structure to start doing business tomorrow. You can just be a sole proprietor and pay self-employment taxes. However, you will miss out on some key protection that owning an LLC can provide. The two big benefits of LLCs are asset protection and not paying double taxes.
What do LLCs protect you from?
The main reason people form LLCs is to avoid personal liability for the debts of a business they own or are involved in. By forming an LLC, only the LLC is liable for the debts and liabilities incurred by the business—not the owners or managers.
Converting an LLC to an S corp isn't the right solution for everyone, but it can be an excellent choice if you're looking to grow your corporate membership or take advantage of the unique tax benefits.
Investor-Friendly Taxation
Moreover, investors in C-Corps can benefit from capital gains if they sell their shares at a profit. These features make C-Corps an appealing option for venture capitalists and other investors seeking a tax-efficient investment vehicle.
A corporation lives forever. It has no expiration date as an entity and from its formation is regarded as existing in perpetuity unless dissolved. An LLC is more dependent on its state law. From its roots as a partnership, it was originally created with an expiration date of no more than 30 years.
Some angel investors choose to invest through LLCs rather than as individuals. Generally, passively investing through an LLC rather than as an individual offers no tax advantages.
