Risk protection with tax flexibility
The other huge benefit of an LLC is that you can choose your tax structure, and change it over time.
If you will operate at a loss, breakeven, or small levels of profit, you can keep the company taxed as a sole proprietorship or partnership on your personal return. You continue to pay self-employment tax, but you don’t have to file a second tax return.
As your profits grow, you have the option to switch to being taxed as an S-corporation, which will save a lot of money on taxes, without re-incorporating your company. More on the delightful benefits of S-corp tax status tomorrow.
An LLC can be a subsidiary of another company and can be owned by a non-US citizen. LLCs can have an unlimited number of members, and they can be bought and sold according to your operating agreement.
For downsides, you need to understand and follow the LLC operating rules, or you may give up your risk and tax benefits. (This is called "piercing the corporate veil.") If the LLC is taxed as a sole proprietorship on your personal return, you still have to pay quarterly estimated taxes and self-employment tax. In some states, your LLC may not survive your death. If you plan to take on venture capital or a lot of investors, LLCs are not a great choice because you can't issue shares.
For most businesses, an LLC is a terrific choice. You get risk protection and flexible tax benefits.