How to Close an LLC after Bankruptcy
The pros of creating an LLC (Limited Liability Company) include limited personal liability and tax flexibility, while the cons involve administrative requirements and potential self-employment taxes for some members.
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Last Updated: March 12, 2026
Most people don’t make major decisions with a coin flip. Savvy people lay out their options, weigh the pros and cons, and do some research. That measured approach is especially important for entrepreneurs who are considering starting a limited liability company (LLC). This decision can have a lasting impact on the business, so it’s important to get it right.
There are quite a few advantages to forming an LLC, but it’s not all rainbows and sunshine. Depending on an entrepreneur’s situation, creating an LLC could be an exceedingly smart move, or it could be a poor choice. But how can someone know if the pros outweigh the cons?
That’s where this guide comes in; this article spells out the long list of advantages and disadvantages of the LLC structure. With this information, entrepreneurs can skip the coin flip and rely on what they’ve learned to decide whether an LLC is right for them.
Entrepreneurs love the LLC as a business structure because it fills in the middle ground between the more casual approach of a sole proprietorship or general partnership and the formalities of a corporation.
Corporations have much more complex compliance requirements, whereas sole proprietorships and partnerships aren’t even considered to be separate legal entities from their owners. But LLCs fall nicely in between, providing structure and flexibility where each is necessary. For more detailed information, see the LLC definition page.
So what are the defining characteristics of an LLC that make this business type a better (or worse!) option than those other entities? It’s time to find out!
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This is the big one, the main reason why many entrepreneurs decide to start an LLC. Personal asset protection means that if a business is sued and the court rules against it, creditors cannot pursue the owner’s personal possessions, such as their house, cars, and personal bank accounts.
Instead, they can only go after the LLC’s business assets. In this way, the owner’s liability is limited, hence the name “limited liability company.” In contrast, running a sole proprietorship or general partnership puts the owner’s possessions at risk because they allow creditors to pursue anything they own.
Forming a corporation is like piecing together a puzzle – there are a lot of moving parts and steps. By comparison, the limited liability company is relatively simple to form, and the ongoing compliance requirements aren’t complicated either.
An LLC’s formation paperwork is quick and painless. An entrepreneur completes and submits an Articles of Organization form, then, boom, their LLC is formed. Every state has specific Articles of Organization forms on its website, so it’s really just a matter of filling in blanks and paying a fee. As for the maintenance requirements, many states require annual reports, but they’re mostly easy and just a way to update the state about any important changes to the company’s contact info.
While an LLC owner can, technically, choose to have their business taxed like a C corporation or S corporation, the vast majority of LLCs stick with the default, which means they’re taxed like a partnership.
This means that business profits “pass through” the business entity and are claimed on the owners’ personal tax returns instead ― there is no business income tax return at all at the federal level (the only exception is the informational return that multi-member LLCs would file) . It helps LLCs avoid the double taxation that usually befalls corporations, where profits are first taxed on the corporate level, and then again on the individual level.
This tax model might repeat at the state level, but entrepreneurs should verify how their state handles LLC taxes to be sure.
Being able to customize the company’s managerial structure can be a huge advantage as a business grows and evolves. The LLC gives its owners not only flexible management but also flexible ownership.
How? First off, it’s possible to form either a single-member or multi-member LLC, and the business can have as many members as desired. One? Five? 300? It’s all good. This flexibility makes it easy for an LLC to grow aggressively without having to alter its business structure (unlike, for example, limited liability partnerships, which require multiple owners, or S corporations, which cannot exceed 100 owners).
But there’s more flexibility to go around. If the LLC members want authority over daily managerial tasks, by all means, they can take it. The owners will simply designate their LLC as member-managed on their formation documents and operating agreement. Or, if the owners have bigger fish to fry, they can outsource those duties to specified managers, designating the LLC as manager-managed.
This is a nice option because an LLC might initially be better-suited to member management, but down the road, after it’s increased in size, the owners might want to bring in some help.
Rather than distributing company profits to shareholders like a corporation would, LLC owners get to decide how they want to allocate them. Maybe the owners want to split it equally. That works! But if certain members are more invested than others, they might want distributions to reflect that. With an LLC, either option is possible. The members just need to ensure they’ve drafted a detailed outline of their distribution in their operating agreement, just so that there are no disputes later on.
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While an LLC doesn’t pay corporate income taxes, its owners will owe a bit more on their personal taxes. This is because the government does not consider limited liability company members to be employees of that LLC, but rather self-employed individuals.
This means that each member will need to pay self-employment taxes on their share of LLC profits. Self-employment taxes include both the employee and employer shares of Medicaid and Social Security, which comes to a rate of 15.3%. This is, of course, in addition to normal income taxes.
While corporations usually have the highest formation and ongoing compliance fees, limited liability companies still have considerably higher expenses than sole proprietorships or general partnerships.
How much the LLC owners will pay, however, depends on the state. Every state charges some sort of formation fee, which can range from less than $50 all the way up to several hundred dollars. On top of that, most states also have annual report fees, which vary widely depending on the state.
Entrepreneurs should check with their specific state’s government to know how much they should write into their LLC’s startup and annual budgets.
Ah, paperwork. Whether it’s starting a business, going to the doctor, getting married, or doing seemingly anything else, paperwork is impossible to avoid. Forming an LLC is no exception. Once again, limited liability companies might not require quite as much paperwork as corporations, but they certainly require more than sole proprietorships or general partnerships.
An LLC should keep copies of its formation documents, annual reports, tax documents, an updated list of members and managers, and an operating agreement. Because sole proprietorships and general partnerships don’t need any of these documents, they have no responsibility to keep them. LLC record-keeping isn’t a ton of work, but it’s one more addition to a business owner’s to-do list.
Limited liability companies certainly attract more investments and venture capital than sole proprietorships or general partnerships because many investors see them as more credible and reliable. However, LLCs aren’t nearly as attractive to venture capitalists as corporations.
This is because LLCs cannot issue stock, so the only way to attract investors is by selling membership shares in exchange for investments, which isn’t nearly as common as investing in a corporation. So, if an entrepreneur anticipates their business needing investments during the startup phase or later on, there’s no guarantee that an LLC can deliver them.
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If an entrepreneur isn’t thrilled about the idea of forming their own limited liability company, there are other options. Of course, there’s a little give and take. It is possible to outsource the LLC formation process to reduce paperwork, but it would increase start-up expenses.
Some entrepreneurs like to hire a lawyer or accountant to form their LLCs, which is a reliable option but also a very expensive one. Instead, ZenBusiness has an online LLC formation service that can professionally form a new business for a fraction of what it would cost to hire a lawyer. Or, DIY’ers can check out the ZenBusiness guide on how to start an LLC.
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As a reminder, here are the essentials: LLC advantages include personal asset protection, simple formation and maintenance, pass-through taxation, flexible management, and flexible payouts. On the other hand, its disadvantages include self-employment taxes, formation and maintenance fees, paperwork and record-keeping, and the difficulty of attracting investors.
Now that entrepreneurs have seen both sides of the scale, all that’s left to do is to weigh their options. Choosing a business type is a complicated and personal decision. It’s important to consider the size of the company, the state of formation, and the nature of the business when choosing whether or not to form an LLC. With this careful consideration, entrepreneurs can feel confident they’re taking the route that will best serve the business and propel it toward success.
The best time to start an LLC is arguably before the company starts conducting business. While it is entirely legally acceptable to operate a business as a sole proprietorship or general partnership before forming an LLC, doing so subjects the owner to a number of risks that LLCs don’t have to worry about.
For example, informal business structures don’t have limited liability protection, so any lawsuit filed against the business can include the owner’s personal assets as well as the business assets.
The answer to this question lies in the owner’s personal preferences, but here are some general pointers. An attorney will cost the most by a mile, but also provides expertise that’s not available with the other options. The DIY route is free of charge but can require quite a bit of legwork and provides no peace of mind that the process is being completed correctly.
Using an LLC service means the business will be formed by professionals who know what they’re doing, while also costing significantly less than a lawyer. This “best of both worlds” attribute is what makes LLC services a preferred option for many entrepreneurs.
Using an online LLC service removes much of the hassle from the business formation process. With these services, all someone needs to do is provide the service with the name, location, and industry the business operates in, along with some info about themself and their registered agent.
The service then creates the articles of organization and files them with the state to create the client’s new LLC.
Absolutely. There are quite a few reputable companies offering LLC formation services these days, including ZenBusiness and several others. Many brands offer different packages with a variety of price points and features.
In some ways, using an LLC service can help protect a business owner’s privacy, especially if they choose to also have that company serve as their registered agent. But that’s not always the case. Sometimes, hiring a registered agent service (instead of the owner serving as their own) will keep the owner’s personal address off the public record. In other states, the owner’s personal address goes on the public record anyway, even if the business hires a registered agent service. Business owners should verify their state’s policies rather than assume that hiring a service gives privacy protections.
This is an impossible question to answer in an across-the-board manner, as each business type has its own advantages and disadvantages. That said, the LLC is typically the more suitable option for small businesses and solo entrepreneurs, while the corporation is usually a better fit for large companies. For more info, check out the LLC vs corporation comparison guide.
LLC Resources
Start an LLC in Your State
When it comes to compliance, costs, and other factors, these are popular states for forming an LLC.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.
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