When you are starting a new business, you have many options on the type of business structure or entity you can choose. We covered these in depth in the Ultimate Guide To Incorporating.
Of all the options, the one that is most popular for entrepreneurs these days is the Limited Liability Company or LLC. It is the entity we chose for Go For Launch.
Whether you are a sole proprietor or are just starting a business, you may have wondered about incorporating as a LLC. Many business owners assume that turning their business into an LLC might be time-consuming and costly—neither of which are true.
The Advantages of LLCs
The benefits of making your business an LLC generally outweigh any apparent disadvantages. Such benefits are not available to general partnerships and sole proprietors. Here is what you stand to achieve:
Assets are protected: If you concerned about potential legal and financial risks of running a company (and you should be!), LLCs are a great option. They offer you limited liability protection as a business owner of the firm. Creditors cannot force you to use personal assets like your savings accounts or property to pay the business’ debts. On the other hand, in the case of a general partnership or sole proprietor, the business and its owners are considered legally interchangeable. This makes the personal assets of the owners vulnerable to loss.
Increased credibility: LLCs can be particularly helpful when you are starting a business. Creating an LLC allows a new business to establish credibility with potential customers, vendors, partners and employees. They will see that you have made a formal commitment to your business.
Pass-through taxation: Taxes are generally not paid by LLCs at the business level. Any business income or loss is “passed-through” to the owners. The event is subsequently reported in the income tax returns of the owner(s).
Additional tax benefits: An LLC can be owned by a number of entities. Up to 75 entities can be the owners of an LLC. The profile of an owner may vary from non-resident alien, partnership and corporation. The owners may also have shares in another corporate entity.
Limited compliance requirements: There are fewer yearly state requirements for LLCs. They also have lesser formalities compared to C corporations and S corporations.
Fewer restrictions: The restrictions on limiting the number of owners of an LLC or on deciding who can own the company are also lesser compared to S corporations.
Management structure remains flexible: No restrictions are imposed on LLCs to establish the organizational structure agreed upon by the owners of the company. The management of the company can be handled by the members (owners) or even by the managers. It is different from corporations, which typically have directors forming a board that oversees important business decisions. The daily affairs are managed by the owners in LLCs.
Reduced paperwork: LLCs can be flexible in their operations compared to S-Corps or C-Corps. However, you do need an LLC Operating Agreement specifying the rules governing the business.
For these and other reasons, LLCs are ideal if you are a sole proprietor or a partner in a small business. However, be sure to consult with a CPA or attorney when deciding the business entity you will form. My favorite resource for information about forming companies is Northwest Registered Agent—this is who we used to set up our LLC and serve as the registered agent for the company.
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Photo credit: Markus Spiske
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