What type of business formation should you choose? This is a question that plagues many people when starting their own business. A business formation comes with many long-reaching repercussions. Your personal liability, how you pay taxes, and the regulations you encounter will all depend on the business formation you choose.
One of the best business decisions you could make right from the start is making it a Limited Liability Company, better known as LLC. There are many benefits of an LLC company, which we’ll share with you in this post and ensure you make an informed decision. Let’s look at some LLC advantages and some possible disadvantages as well.
What Is An LLC?
An LLC is a legal entity created by state law that can be used to either start a business or hold assets. This is considered as the most effective, easiest, and flexible business structure to create. It’s a hybrid between a sole proprietorship and a corporation, but so much better than both.
An LLC comes with the pass-through tax benefits of a sole proprietorship and a business partnership while still offering the limited liability of a corporation. This gives you the much-needed advantage you need when starting out a business — a win-win situation from a legal and tax point of view.
Essentially, when you start your business as an LLC, it’ll start out as a legal entity with separate assets and debts from your own personal finances. The owners of LLC companies are known as members. It’s possible to own a limited liability company as a single person, which will make it a single-member LLC, or more people, which would make it a multi-member LLC.
There are many advantages of starting an LLC business, some of which we’ll address below.
1. Personal Asset Protection
One of the primary reasons why most entrepreneurs choose to go with an LLC business structure is for personal asset protection. With an LLC business, you have a barrier between your business and personal finances and assets. Personal assets include all the things you own, from cars to real estate, bank accounts, trucks, or even boats.
If at some point, your business is sued, your credits can only go after your business assets to settle liabilities and debts, but never your personal assets. With other business structures, however, your personal assets are always at risk of being seized together with the business assets.
2. Be Your Own Boss
As an entrepreneur, you are probably self-starting your business, which is an incredible start. One of the most significant LLC advantages is that most states recognize single-member LLC companies. This means you can be a sole owner who makes their own business decisions.
You don’t need to consult partners like you would in a general partnership, or ask for approval from a board of directors like you would in a corporation. It’s like having a sole proprietorship only without the liability issues.
You can hire corporate secretarial services and start a successful business without involving other members. If you do have partners, you can easily sign an operating agreement and decide on respective obligations and roles.
3. Avoid Pass Through-Deduction and Double Taxation
If you choose a standard corporation business formation, you’ll be facing double income taxation. Both the corporation’s profits and shareholder’s income on dividends will be taxed. With an LLC, however, you’ll receive a “pass-through” treatment that will allow profit to be taxed just once on every member’s income return tax.
4. Less Paperwork and Administrative Hassles
One of the major benefits of an LLC is how easy it is to establish and maintain. Limited liability companies require less paperwork compared to other business formations. To register your company’s existence, all you have to do is file articles of organization then pay a fee to the authority, normally the secretary of state.
Essentially, this information will include the name of the limited liability company, its location, its members, planned duration of business, and other possible mandated information. Starting corporations is much more complicated.
5. Flexibility in Sharing Profits
Most businesses share profits based on the percentage of ownership or capital contribution. For instance, you’ll find that in general partnerships, profits are shared equally. Corporations, on the other hand, share dividends based on each stockholder’s interest.
One LLC benefit, however, is that members have the flexibility to determine how profits are shared under the terms of their operating agreements. With a limited liability company, you are not limited to a proportion of ownership, and you may decide to allocate the profits however, you deem necessary.
For instance, one of you may agree to take less if another member agrees to put in more work. That said, you may not divide your profits under certain circumstances. For instance, if the allocation endangers solvency or if the company’s liabilities equal to its assets.
6. Management Flexibility
LLCs are quite different from corporations. Corporations usually have a fixed management structure with board of directors. They oversee all company policies and run daily business tasks. Corporations also have shareholders that elect directors and oversee other aspects of the company.
An LLC company does not have such a structure, however, and owners can choose how they operate the business and how they make decisions.
Making the Right Decision
As you can see, there are many LLC advantages, such as flexibility and protection. It will shield you and other members from personal liability and at the same time, afford you an array of tax options.
Of course, it may not be the best business formation for you, and you may need professional guidance to decide whether it’s the best decision.