What Are The Benefits of an LLC?
Regardless if you are just beginning your company or have been operating as a sole proprietorship or general partnership, you should look at incorporating your company as an LLC or Limited Liability Company. Many business owners assume it’s too pricey or time-consuming, but both assumptions are incorrect.
The advantages of creating an LLC typically overshadow any perceived disadvantages. In this article, we’re going to outline what some of the benefits of LLC incorporation are. The main advantage that LLCs offer is the protection of your personal assets. LLCs provide limited liability protection to their owners, making them NOT personally accountable for the company’s financial obligations and liabilities. Creditors cannot pursue the private assets – like their house, savings accounts and shares of stock – of the proprietors to pay for business financial obligations. On the other hand, inside a sole proprietorship or general partnership, proprietors and the business are legally considered the same legal entity, making personal assets vulnerable.
LLC companies typically don’t pay taxes in the business level. Any company earnings or loss is “passed-through” to proprietors and reported on their own personal tax returns. Any tax due is paid at the individual level. This is different from other types of incorporation where double taxation happens – once when company earnings are taxed, and twice when the owner or shareholder receives profit.
But far beyond protection and taxation, having the LLC after your company name establishes your credibility with your potential clients, employees, suppliers and partners simply because your company is a legal entity.
LLCs also have limited requirements for compliance, unlike S-incorporated companies and C-incorporated companies.
LLCs can establish any business structure decided on by the owners. An LLC company could be handled by the owners or by managers, unlike companies that have a board of company directors who oversee the main business choices of the organization and managers who manage your day-to-day matters.
To create an LLC, a document called Articles of Organization should be filed before the state and the relevant fees must be paid. Many states impose ongoing taxes, for example, annual report tax, and/or franchise tax.
While these costs frequently are not so costly for smaller businesses, LLC formation is more costly compared to a sole proprietorship or general partnership, each of which aren’t needed to file for formation documents before the state. In Arizona and New York, LLC owners are also required to publish notice of the LLC formation in local newspapers for weeks. This is often pricey.
Aside from the cost, you will also find that the transfer of ownerships in an LLC is more difficult than other types of incorporations. With businesses that are formed as corporations, ownership can be as simple as assuming shares of stock. In an LLC setting, however, all the owners must approve before adding new proprietors or changing the percentage of ownership of existing proprietors.
Also, since the LLC is really a more recent kind of business structure, there’s much less legal precedents compared to corporations. This can be a good or bad thing, depending on how you look at it. Anyway, if you plan on organizing your company as an LLC, you can either do it yourself or have someone else do it for you. If you ask us, however, we think the latter is the more practical option – at least you can focus on running your business instead of going back and forth with government agencies.
If your business is currently operating as a sole proprietorship, changing it to an LLC is to your advantage. The LLC setup is really one that’s in the middle of the road. While your personal assets are protected, you still have the flexibility of managing a business hands-on instead of being operated by a board of directors (as in the case of corporations).
Until lately, becoming a business corporation was the only real protection to entrepreneurs for limiting their personal liability in business. With the LLC, business owners are now able to defend themselves against any present and future liabilities from the business without needing to incorporate. Also, as more and more states recognize the LLC structure, the tax benefits to your organization cannot be over-emphasized.
For individual business proprietors, the LLC provides a one-person LLC form, that is taxed like a sole proprietorship. You can be paid through the profits of your company, which are taxed at the owner’s lower marginal tax bracket. You will also benefit from the pass-through of your business losses.
For companies with multiple proprietors, the LLC form offers similar tax benefits and other advantages of the corporate form. When the proprietors or people of the LLC do nothing at all, their LLC is going to be taxed like a partnership by default. However, they are able to elect for the LLC to become taxed like a corporate organization, which is often the preferred option. And within that choice are two other choices – to be taxed as either an S or perhaps a C corporation.
When the proprietors from the LLC wish to keep the business’s profits within the LLC to be able to facilitate the development from the business, the most well-liked choice is a C corporation. Under this type, the LLC’s profits are only subject to the minimal corporate tax rate of 15 %, which is most probably lower than the personal marginal tax rates of the owners. And when the LLC’s proprietors/people wish to receive compensation, they may be compensated W-2 wages for his or her efforts related to the business.
If, however, the proprietors from the LLC wish to some of the profits from the business, the most well-liked election is definitely an S corporation. Each owner or member will get their professional rate share from the LLC’s bottom line profit as a distribution of profit, which is taxed as personal income, but is not charged self-employment tax.
If you think organizing an LLC is best for you, go ahead and do the necessary work to organize your business that way.