When you first start a new business, you have many choices. One option is to follow the lead of large, hugely-successful companies and form a corporation. However, you may have also heard that a limited liability company is a smart option for smaller businesses.
Have you been considering forming an LLC? Do you want to know what the benefits of forming an LLC actually are? If so, you are in the right place. Here you can learn about the many advantages offered when you form an LLC.
- Limited Personal Liability
If you have a business that is a sole proprietorship or a partnership, then you along with your business are considered the same person from a legal standpoint. This means your business debts are also considered to be your personal debts. Also, if you have a business partner who is accused of any negligence, then your personal assets may be put at risk.
With an LLC, you can limit this type of personal liability because the LLC is considered a legal entity that is completely separate from its owners. An LLC is responsible for its own debts and its obligations. While you can lose the money you have invested in the business, your personal assets, such as your bank account and home can’t be used for collecting business debts. Also, your personal assets are protected if your business partner, the business itself or an employee is sued for negligence.
- Much Less Paperwork
A corporation also provides the benefit of limited liability; however, they have to follow specific requirements that are usually not ideal for small or informally managed businesses.
For example, a corporation usually has to hold shareholder meetings annually, pay annual fees to the state and make annual reports. They are also required to have substantial, in-depth records.
In contrast, an LLC doesn’t have to hold any type of annual meeting and they probably won’t be required to keep extensive records. In fact, in a number of states, an LLC doesn’t even have to file any type of annual report.
- LLC Tax Advantages
When it comes to taxation, an LLC gets the best of both worlds. An LLC does not have its own federal tax classification; however, it can adopt the tax status of C or S corporations, or a partnership or sole proprietorship.
The IRS (Internal Revenue Service) will automatically classify an LLC as either a sole proprietorship or a partnership based on if it has one or more than one owners. What this means is that an LLC can take advantage of the “pass-through” taxation, where the LLC won’t pay any corporate taxes or LLC taxes. Instead, the expenses and income of the LLC pass through the owner’s own personal tax returns. At this point the owners will pay income tax on any profits earned.
The other option is to take on the tax status of a C or S corporation. A C corporation will be taxed twice – once on the distribution to the shareholders at the corporate level and once at the individual level. An S corporation can avoid double taxation and receive the pass-through tax treatment, but not every corporation is going to be eligible.
If you are at the point where it is time to determine what type of business entity you want to form, carefully consider all the benefits offered by an LLC. You will reap all the advantages listed here, and more. In the long run, this is the smartest choice for a wide array of small and medium sized businesses.