Thinking about starting an LLC company? We have created a list of the top benefits of owning an LLC.
An LLC or “Limited Liability Company” offers a lot of benefits that you need to be aware of when starting a business.
In our comprehensive LLC guide, you will learn about some of the major pros and cons of starting an LLC and using it as the preferred legal structure for your business.
What Is A Limited Liability Company?
An LLC is a structure that has members. The members of the organization own it. Much like a corporation, an LLC offers similar protection in instances where the business suffers a loss or if a business is sued.
Likewise, an LLC also benefits from being able to pass through taxation similar to that of a partnership or a sole proprietorship.
Because of these things, an LLC could be a good option to consider. It’s the best legal entity choice for any business owner looking to:
- Insulate themselves and protect their assets
- Deduct more on their taxes
- Effectively position their business for better growth possibilities
- Improve the credibility of their business as a whole
Check out our complete Limited Liability Company Guide here.
Some Top Advantages Of Forming An LLC:
An LLC is a good business structure for a small business. There are plenty of reasons for this. Here are some of the major benefits that you can get from forming an LLC.
1. It’s Easy
One of the primary benefits of starting an LLC has to do with it being so easy. It’s a much easier option than a corporation. Likewise, it doesn’t require nearly as much paperwork. With an LLC, you don’t have extensive requirements you have to factor into the process. The most likely requirement is to file a formation document. Whereas, a lot of states may not even require you to file annual or other reports.
An LLC should have an operating agreement in place, it’s not exactly required.
Whereas, if you form a corporation, it is required. Not only that, but you are also required to hold annual shareholder meetings, record the minutes for each meeting, maintain all of the records, record business resolutions, file yearly reports, and even pay a yearly fee.
It’s easy to see how much more hands-off an LLC is. It requires much less maintenance in total which can be attractive for a small business owner without a lot of time.
2. Liability Protection
Another major benefit is the fact that you can insulate your assets and protect them easily with one. If your business ends up getting sued, you don’t have to worry about being personally held responsible. Your house, car, and other assets are going to be protected. This is why an LLC stands for “limited liability protection.” While there are limits to the level of protection, it should insulate you enough to give you peace of mind. Find out more about LLC statutes here.
3. Tax Benefits
An individual member of an LLC is typically taxed as a disregarded entity. Whereas, a multi-member LLC is usually taxed as a partnership instead. Because of this, LLCs automatically benefit from these taxation advantages. The entire LLC is not taxed as an individual entity. This allows the owners within the LLC to keep from getting double taxed.
Likewise, an LLC can also choose to be taxed as either an S or a C corporation. There are plenty of benefits to be aware of when it comes to this. A single-member limited liability corporation could find that this type of tax structure helps to solidify the lines between their personal and business money. It can also prove to be beneficial for its corporate tax rate.
4. Flexibility In Ownership
An LLC will typically have a lot fewer restrictions when it comes to the number of owners it has and how the company is being managed. An LLC can usually choose between being member-managed and manager-managed.
Whereas, a corporation needs to have a board of directors that get elected yearly by the shareholders. These yearly meetings have to be used to conduct any type of company business. On the other hand, an LLC doesn’t have these same regulatory requirements and the owners within the LLC have more flexibility when it comes to the structuring of their company.
A Few Disadvantages Of An LLC
One of the most significant disadvantages of forming an LLC has to do with the investors having to pay tax on the earnings of the company no matter whether or not they got any distribution from it. Likewise, an investor will need to wait until they file their taxes before they can get the needed K-1 form from the company. This adds hassle which makes it less attractive for investors.
On the other hand, a C corporation’s investors don’t need to pay taxes unless they get a dividend from the business. Also, they can have a much easier time filing personal taxes because there isn’t a need to wait. This makes it a much more compelling option for an investor that doesn’t want more of a hassle.
Sole Proprietorship vs an LLC
Forming a sole prop is one of the easiest business structures you can opt for. It’s not considered a legal entity from the owner. As a result, with a sole prop, the owner gets all of the profits and they assume all of the risks. There is absolutely no personal asset protection with this type of company.
An LLC that only has one owner is going to get taxed just like a sole prop. However, they are considered disregarded entities by the Internal Revenue Service which means they can still benefit from having pass-through taxation like a sole prop without forfeiting personal asset protection.
Likewise, a single-member limited liability company can have an easier time not only building credit but also raising their cash.
With a sole prop, the owner is going to have to use their credit line to get the funds or loans they need for their business. No matter if they file for a Doing Business As name or not, they will need to use their credit. This is even true if they have a business bank account. They’ll always be held personally liable.
Partnership Vs an LLC
A partnership is a legal entity that is more informal of a structure. It typically has two or more owners in it. Much like a sole prop, a partnership offers pass-through taxation. It will require each individual to report the company’s gains and losses on their tax returns.
An LLC that has more than one owner is going to be taxed much like a partnership by default. With a multi-member LLC, you get the same pass-through taxation but you also get personal asset protection.
A partnership is an entity that requires less paperwork than starting an LLC, but it fails to deliver the kind of personal asset protection you should be looking for if your business is sued.
While you can get some type of protection through a limited partnership formation or a limited liability partnership, they aren’t readily available in every state. Whereas, an LLC is readily available.
What Structure Should You Go With?
As you can tell, there are plenty of benefits of opting for an LLC for your company’s structure. Not only does it deliver more flexibility with taxation, but it delivers good protection for your assets. Here are some major things to consider when choosing.
Things To Consider:
- What your risk level is and what your profits are expected to be.
- Do you need your structure to be investor-friendly?
- Are you looking to maintain a more complex structure or something easy?