Q: How do I know if I should create an LLC for my company? What are the downsides?
This question is very complex for a short answer. Some general considerations are: do you need protection of your personal assets from potential business debts or liabilities; are there investors who do not wish to participate in the day to day activities but wish to invest and share in profits or losses; losses or income will be attributed to owners on their personal taxes at the end of the year potentially; there are other tax advantages which should be discussed with your accountant/cpa.
Some of the downsides are: the initial expense of set up and continued expenses annually of fees due the state, which charges can be expensive; some states have franchise or capital values tax on LLC's; investors may want to invest in a corporation, making it harder to raise capital investments; unless you are a single owner LLC, ownership of the business is spread across it members; as a member of an LLC, you are not allowed to pay yourself wages.
The question of the form of business should be discussed personally with an experienced attorney so that the facts of your situation will control the type of business - LLC, S Corp, C Corp, Sole proprietor.
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