Benefit of an LLC: Everything You Need to Know
Knowing the benefit of an LLC is important when deciding which type of entity you wish to choose to start your business.3 min read
Knowing the benefit of an LLC is important when deciding which type of entity you wish to choose to start your business. When there are two or more people starting a business, you have the option of forming as a:
- Limited liability partnership.
- Limited liability company.
All entity choices have their pros and cons, and the one you choose will largely depend on the situation, type of business, state laws, and the amount of risk you wish to take. You may wish to speak to an attorney or an accountant before deciding the best option for your business.
What Is an LLC?
LLC stands for Limited Liability Company, which means it operates as an entity separate from you. LLCs are popular choices among new business owners as they combine many of the advantages of corporations, partnerships, and sole proprietorships. An LLC will have its own federal tax ID number and fall under the laws of the state in which it is formed. A Limited Liability Company is a middle ground between a partnership and a corporation.
An LLC is easier to set up than other entities and can have as few as one member to as many as you would like. There are some businesses that cannot form as an LLC such as insurance companies and banks. LLCs are able to operate more freely being guided by an operator's agreement instead of bylaws created to protect the shareholders of a corporation.
Benefits of Forming an LLC
Forming your business as an LLC comes with many advantages including:
In most states, by forming as an LLC, both the owners and investors will enjoy a limited liability from debts incurred by the company. This means in the event there is a claim or lawsuit against the company, owners and investors will only be liable for what they invested in the company. LLC is often chosen over a sole proprietorship due to the protection it provides.
Liability protection is important when seeking out outside investors who will want to make sure that their personal assets will be protected.
No Double Taxation
In the eyes of the IRS, an LLC is a pass-through tax entity which means the company is not separate from the owners or investors from a tax standpoint. Because of this, the LLC will only be taxed one time, and that is through each owner or investor's share of the profits on their personal tax return.
This can be desirable over a corporate entity, which is subject to double taxation, once at the corporate level and a second time on the shareholder's earnings from the company. It is important to note that an LLC's profits are not considered income, and you will be required to pay self-employment tax on them.
An LLC offers a lot of flexibility including when it comes to income distribution. This makes it much easier to allocate both profits and losses for tax purposes. While you cannot pay yourself a wage when you are an owner of the LLC, you can write checks to yourself directly from the business banking account, which allows you to take advantage of more tax-favored fringe benefits. Even though you have the flexibility to divide the profits of an LLC up as you see fit, the distributions should be in line with how the shares are portioned.
Simple and Inexpensive
It is easy and inexpensive to set up an LLC. To form, all you need to do is complete and file your Articles of Organization with the state government in which your business will be formed. While the fee for filing varies from state to state, it is relatively small, especially when compared to other entities. LLCs also require less paperwork and less record-keeping than other entities.
LLCs are easier to maintain than other types of business entities. Unlike corporations, there is no requirement to hold board meetings, keep minutes, or other formalities. With fewer formal requirements also comes less risk due to improper or late filings. All that is required is to meet your state and IRS requirements.
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