There are more than 30 million small businesses in the United States. And, they make up 99.9% of all American companies! So, though entrepreneurship isn’t uniquely American, running your own company has its advantages.
If you’ve been thinking about starting your own business, the first thing to consider is your formal organization status; does a sole proprietor, partnership, limited liability company (LLC), or corporation work best for you?
Keep reading to learn about the benefits of forming an LLC and how to get started.
As said on LLCGuys.com — ” The LLC protects the members from personal responsibility for business debts or other liabilities.”
What Is an LLC?
A limited liability company (LLC) is a business structure. A member or group of members own the business. The LLC protects the members from personal responsibility for business debts or other liabilities.
An LLC is like a hybrid business model. It combines characteristics of both corporations and partnerships or sole proprietorships. For example, an LLC is easier to establish and maintain than a corporation. Additionally, LLCs offer financial protections that partnerships and sole proprietorships don’t.
LLC regulations vary from state to state. Thus, the process of starting an LLC is slightly different depending on which state you live in. If you are unsure about how to start your LLC, you can follow your state’s directions. Each state should have its directions posted online.
Most states allow you to register and file online, making the process seamless. You can also seek out assistance from business professionals if the directions are unclear or you have further questions.
Doing Business As
Often, business owners use a DBA (doing business as) before forming an LLC. With a DBA, you can go through a simple certification process to formally use your business name.
However, a DBA does not legally separate you from your business. This means your personal assets don’t have protection if someone sues you. As mentioned, the same is true for a sole proprietorship or partnership.
Thus, this is just one of the many benefits of forming an LLC. Let’s discuss this idea more in-depth.
Personal Liability Protection
Forming an LLC protects your personal assets. For example, if someone sues your business or your business suffers losses, your personal assets cannot be held responsible for the LLC. This includes your private funds, house, and car.
Limited liability protection is vital.
But, as an LLC owner, if you fail to separate your business and personal finances, you can risk losing that protection. This is because failing to separate finances breaks the corporate veil. You also risk losing liability protection if you commit fraud.
Tax Benefits
Another one of the most significant LLC benefits relates to taxes. LLCs have pass-through taxation. This means that the LLC’s profits pass through the members’ individual tax returns. The government doesn’t tax the LLC as a business entity. Thus, you avoid double taxation.
A corporation faces double taxation. The business entity receives a tax, and the shareholders receive a tax. However, LLCs can also opt for C-corporation or S-corporation taxes if they wish.
The government taxes multi-member LLCs similar to a partnership. A single-member LLC receives a tax as a disregarded entity. It’s similar to a sole proprietorship, except that an LLC comes with the liability mentioned before.
Yet, some single-member LLCs benefit from a corporate tax structure because it strengthens the distinction between personal and business finances. Since the corporate tax rate is different, this may be beneficial to some LLCs too.
When it comes to LLCs and taxes, there is much flexibility that serves the owners.
Easy To Form and Sustain
Forming an LLC is much easier than creating a corporation. It also requires less yearly paperwork. When you form an LLC, you need to file your formation documentation. Usually, this is the Articles of Organization.
Some states require that LLCs file periodic reports. But, some don’t require them at all. And, LLCs are not required to have an operating agreement.
However, business professionals highly recommend having an operating agreement in place for your LLC. Especially with several owners, it helps to clarify business practices and owner responsibilities. An operating agreement can also establish how the business will share profits.
With a corporation, you must have an annual shareholder meeting, file reports, maintain records, and much more. There are many strict regulations corporations need to follow.
Member Flexibility
LLCs have minimal restrictions on who owns the LLC, how many people hold the LLC, and how members manage the LLC. In addition, LLCs have two different types of management.
They can be member-managed, where the owners manage the business. Or, they can be manager-managed where members appoint an outside manager.
Whichever you choose, there is a lot of flexibility for owners to do what they want to with an LLC. As a single-member LLC, you can make all your own decisions without receiving approval. Even with multiple members, the operating agreement will lay out each person’s role and obligations to the company. Essentially, you create your business structure.
On the other hand, corporations have a board of directors. The shareholders have annual meetings to elect the directors and conduct company business. So there is no flexibility what it comes to the structure of a corporation.
When to Form a Corporation
Even though there are many benefits of an LLC, they aren’t suitable for everyone. If you plan to seek outside investment for your business, you want to form a corporation. LLCs are not attractive business entities for investors. Before founding a company, be sure to consider this carefully.
Now You Know the Benefits of Forming an LLC
With this guide, you aren’t wondering, “How does an LLC work?”
Instead, you understand this business structure and the benefits of forming an LLC. Small business owners overwhelmingly benefit from starting an LLC compared to other business types. The design allows you to maximize your profits with liability protection.
If you found this article helpful, make sure to check out the rest of the blog for more business advice.
