Data from the International Centre for Trade and Sustainable Development (ICTSD) show that there are 6 million limited liability companies (LLCs) in the US. The figure underscores just how popular LLCs are for entrepreneurs today.
The fame of LLCs can be attributed to the advantages they provide to business leaders. This article outlines these benefits to help you determine if forming an LLC is the right choice for you.
What Is an LLC?
A limited liability company is a business format that enables pass-through taxation and limited liability protection. Like corporations, LLCs legally exist as separate entities from their owners. Hence, institutions cannot hold LLC owners responsible for business liabilities and debts.
Pass-through taxation means that the income of a business is not taxed at the entity level. But if the LLC has multiple owners, they must complete a tax return for the LLC.
Any business income or loss noted in the tax return can be passed on to the members. The owners must report the income or loss through their own tax returns and pay the appropriate tax.
What are the Crucial Advantages of Forming an LLC?
Choosing to form an LLC offers several advantages, and these include:
Limited Personal Liability
Let’s say you formed a sole proprietorship or a partnership business. In this case, you and your business are legally the same entity. So you need to treat your business debts as your personal debts.
If someone claims negligence against your business, partner, or employee, even your personal assets could be at risk.
You can eliminate these problems by forming an LLC, which limits personal liability by separating the business from its owners. Yes, you can still lose the money you invested in creating the company, but institutions cannot use your personal assets to collect your LLC’s debts.
Much like LLC, corporations also provide their owners with limited liability. Unfortunately, owners still have to meet requirements that may not be well suited to a small business.
For example, corporations must hold annual shareholder meetings, pay annual fees, and make annual reports. They also have to meet substantial recordkeeping requirements.
In contrast, LLC members do not have to hold annual meetings. Additionally, they do not need to keep extensive records.
For an LLC, owners have the option to choose between a member-managed or a manager-managed structure.
The former means that members of the LLC will manage the company. In this scenario, all members take part in the firm’s day-to-day decision-making.
Meanwhile, a manager-managed LLC means that a manager takes over the business operations. This executive can either be a member or a professional from outside the company.
Regardless of where you will form your LLC, you will surely enjoy tax advantages. Although LLCs do not have their own tax classification, they can adopt the status of other entities like sole proprietorships, partnerships, C corporations, or S corporations.
The Internal Revenue Service (IRS) automatically classifies local LLCs as partnerships unless the members choose for the company to be treated as a corporation. This advantage allows for pass-through taxation wherein the company does not have to pay any corporate taxes. Instead, members pay taxes through their personal income tax.
In contrast, the IRS taxes traditional C corporations twice on distributions to shareholders: first at the corporate stage and then once more at the individual level. That said, some S corporations, if eligible, can also receive pass-through tax treatment and avoid double taxation.
The initial paperwork you have to complete and the fees you have to pay to form an LLC are relatively light. But it is crucial to note that there is a wide variation in what states charge in taxes and fees involving the process.
Forming an LLC is simple enough for entrepreneurs to handle without special expertise. But it is still a smart move to consult a professional, like a lawyer or an accountant, for help.
These are the significant advantages of forming an LLC today. Hopefully, these benefits will be enough to convince you to start your own business and experience these benefits yourself.
You may be interested in: Exploring the Financial Benefits of Forming an LLC