When starting a business, choosing the right legal structure from the outset can save you a lot of headaches down the line. Sole proprietorships, partnerships, and different types of corporations all have their own advantages and disadvantages, but for many people, a limited liability company or LLC offers some of the best elements of each.
An LLC is not as cheap as a sole proprietorship, and it may not be as good a choice for businesses seeking outside investment as a C corporation (LLCs can’t issue stock, although an investor can receive an ownership interest). Still, as the list of benefits below makes clear, for those in the right position, an LLC can be a great choice.
1. LLCs Protect Your Assets
Limited liability is in the name for a reason. LLCs offer much of the same flexibility that a business owner could find in sole proprietorship, but they do much more to protect the business owner’s personal assets if problems arise. In general, the owner of an LLC isn’t personally liable for most lawsuits filed against their business or for debts it accrues. In simple terms, the LLC’s assets can be taken to pay a debt or in response to a lawsuit, but your own home, car, or savings account can’t.
The protection isn’t complete, and there are some important exceptions. If, for example, you use a personal asset to guarantee a loan for your business, or if your personal and business assets aren’t completely separate from one another, your personal assets could be vulnerable.
Illegal activity, whether knowing or unknowing, can also expose your personal assets. Finally, failure to exercise due care can also leave you liable. It is also worth keeping in mind that if your business is sued you will incur costs, even if you’re not found liable.
All of those help explain why those who choose to form LLCs still need to factor small business insurance costs into their budgets, something you can do at sites like thecostguys.com.
2. Avoid Double Taxation
A regular C corporation has its profits taxed twice: once at the level of the corporation, and then again at the level of the individual investor. For example, paying corporate income tax doesn’t prevent shareholders from paying taxes on any dividends they receive as a result of the same profit.
LLCs, on the other hand, can use ‘pass through’ taxation to their advantage. Profits ‘pass through’ the LLC without being taxed at the corporate level, and are instead taxed on the owner’s individual tax return. Plus, owners of LLCs can take advantage (through 2025) of a 20% tax deduction, yet another reason why some business owners might do well to consider an LLC.
3. Ownership And Management Flexibility
While corporations have legally required management structures and administrative burdens, LLCs give business owners a bit more flexibility. A typical corporation needs officers and a board of directors, and has to hold shareholder meetings annually. An LLC, on the other hand, doesn’t. As an LLC owner, you’re free to make many more choices about the best structure for your business.
There’s also similar flexibility when it comes to ownership of an LLC. Those looking to form a ‘pass through’ entity might look to an S corporation as an alternative to an LLC; however, S corporations have restrictions placed on their ownership that LLCs don’t. For example, an S corporation has to have 100 owners or fewer, and it can’t have foreign owners. LLCs offer a business owner a wider array of choices when it comes to ownership.
4. Easier Administration
It varies from state to state, but, on the whole, establishing an LLC is simpler than going through the same process for many other business entities.
Typically, to form an LLC, a business owner must file articles of organization with the appropriate office in a given state (usually the secretary of state). In that filing, you’ll be asked to provide certain details about your business as required by the laws in the state where you’re filing. Those details usually include things like the name of the LLC, where its main offices are located, who makes it up, and how long it’s envisioned to last, although individual states may have different requirements.
Along with filing paperwork, there are other required steps when forming a corporation. There are mandatory meetings to elect officers, to make determinations about shares, and to create and enact the bylaws that will govern the management of the corporation going forward. Corporations also have ongoing administrative duties, like an annual meeting with shareholders, annual reports they must file, and fees they must pay.
While operating an LLC requires you to keep on top of annual obligations, it doesn’t entail the same reporting and meeting requirements, leaving you with more time to run the business.
5. Profit Sharing
Most business entities have a straightforward way of splitting profits. Usually, the amount of capital you invest in a business corresponds proportionally to the amount of profit you receive from it. For a general partnership, that usually means an equal share for each partner. A corporation can pay dividends based on how much of an ownership share a given stockholder possesses. An LLC, on the other hand, has more options at its disposal.
As the owner of the LLC, you can decide to divvy up the profits however makes the most sense in light of the specific circumstances of your business. Imagine you start an LLC with several partners, one of whom invests less upfront, but works full time on the day-to-day management of the business. You might decide that partner should receive a higher percentage of the profits of the business than their ownership share.
There are limits, of course. For example, you can’t distribute an LLC’s profits in a way that threatens its solvency, or when its liabilities exceed its assets. All told, it’s still an ownership with significant flexibility in terms of profit sharing.
The benefits listed above are just some of the aspects to consider when deciding how best to structure a business. There are other free resources that can help decide whether or not an LLC is the right ownership structure for you, but there’s no substitute for good legal advice from someone who knows the laws governing the specific state where you decide to form your LLC.