Starting your new business venture is an exciting time, but how do you make sure you choose the correct business entity?
The Limited Liability Company (LLC) is the country's most common type of business entity, with 32.5 million LLCs currently active. They are simple to establish, easy to manage and provide vital protections for entrepreneurs.
Let’s dive into the top benefits of owning an LLC.
Personal Liability Protection
The primary reason why LLCs exist is that they provide members with personal liability protection. It means that if someone sues your business, they cannot come after your personal assets, even if you lose.
An ordinary sole proprietorship (an unregistered business entity) doesn’t offer this same protection. Note that liability protection only defends your personal assets. You will need to take out liability insurance and commercial property insurance policies to protect your business and the assets under its name.
Taking out insurance enhances your protection because if you have a comprehensive policy in place, your insurer will cover all the relevant medical costs, legal fees, and settlements if an incident occurs.
Check out your insurance options for LLC entities before initiating any business activities.
Tax Flexibility
An LLC is considered a pass-through entity, meaning that the LLC’s profits and losses pass through to your individual tax return. As a result, you will be taxed at your personal income tax rate, which may or may not work in your favor.
LLCs are not obligated to pay corporate income tax at the Federal level, enabling you to avoid the dangers of double taxation.
The tax flexibility of an LLC comes into play when you decide to elect to be taxed as another type of business entity. For example, you can elect to be taxed as a C-Corporation or as an S-Corporation.
Make sure you speak to your accountant to figure out which tax election will offer you the best tax savings.
Cheap and Easy to Establish
LLCs are the most inexpensive registered business entities to form. States vary in pricing, but you should expect to pay no more than a couple hundred dollars to get it done right. Many states will even allow you to complete the entire process online.
It’s typically unnecessary to employ an attorney to form an LLC, unlike if you choose to form a corporation. Most states now have streamlined step-by-step guides on how to do it yourself, with no required experience.
Less Red Tape
Bureaucracy is always a headache for businesses of all sizes. LLCs offer the least amount of paperwork to maintain. There is no need to appoint a board of directors, keep a record of meeting minutes, or even hold any meetings at all.
You also don’t need to concern yourself with compliance-related documents or written policies detailing the running of your LLC. However, if you have an LLC with multiple partners, you may want to take the time to create these documents anyway.
The only good reason for a small business to convert itself into a corporation is during a period of significant expansion or if you intend on trying to attract institutional investors.
LLCs are the best hands-off option if you want to spend more time running your business rather than worrying about compliance.
Management Flexibility
LLCs have a choice in how they’re managed. For example, you can opt for the member-managed or the manager-managed structure.
Under a member-managed system, the members that make up the ownership of the LLC make all the big decisions. As a result, they play an active role in managing the business's day-to-day operations.
An LLC operating using manager-managed system delegates the firm's day-to-day operations to a manager. The manager may or may not be a member of the LLC. In this scenario, the company owners act more in line with a passive investor.
You’re not required to establish a board of directors, enabling you to run your organization more independently.
Credibility
Business owners who have launched their operations for the first time may wonder why they should go to the trouble of registering their business entity at all. After all, if you’re unregistered, you’ve already considered a sole proprietorship for tax purposes.
Forming a business entity from day one is a good idea because it gives you credibility. Customers and other businesses will always be more likely to trust your business as an LLC than someone with a sole proprietorship.
It may seem like a relatively minor benefit, but with how easy it is to form an LLC, there’s no reason not to go through the process.
Privacy
LLCs can be established under your name, or you can opt for an anonymous LLC. Wyoming is easily the best state for those concerned about privacy because of the stringent privacy rules in place.
If you are concerned about putting your name and address into the public record, LLCs offer a way for you to stay relatively anonymous.
Regarding privacy, every state has its own rules and regulations. Seek out a company formations agent who can give you the latest information on LLC privacy rules in each state.
Remember, you’re not bound to establish your LLC in the state you happen to reside in.
