Depending on your industry, it may be possible to run a business as a sole proprietor or partner. These entry-level entities are easy to establish, don’t require much paperwork, and provide you with substantial flexibility. However, if you’re serious about your entrepreneurial future, you need to consider other types of structures available to you.
For example, there’s the limited liability company (LLC), a formal structure that isn’t much more complicated than a sole proprietorship or partnership, but could provide your company with much more valuable benefits.
The question is, is an LLC worth establishing?
Costs and Upkeep
First, you’ll need to think about the costs and effort required to start and maintain an LLC. Though the name makes it sound intimidating, forming an LLC is ridiculously easy; you can check out IncFile.com to learn more about starting an LLC. In most cases, all you’ll have to do is answer a few questions about your business in a short application, and wait for the application to process. You’ll need to have a few other things in place, such as a formal name and a federal tax ID number, but overall, it should take you long to complete the process.
This is also a relatively inexpensive process. Depending on the methods you use, the state in which you’re establishing your LLC, and whether or not you’re expediting your application process, you can probably plan on spending a few hundred dollars or less.
Ongoing upkeep of LLCs is pretty reasonable as well. At the federal level, there isn’t much you have to do to keep your LLC going. However, there are some upkeep responsibilities that deserve your attention, which vary by state. Some states require you to file an annual report (and pay a fee for the filing), while others require little to no ongoing effort.
How Taxes Work for LLCs
Now let’s take a look at some of the benefits you might receive from creating an LLC. LLCs function as pass-through entities for tax purposes. Their revenues aren’t taxed directly at the federal level. Instead, you’ll pay taxes as an individual on any money you make from the company in the form of a regular salary or profits.
This gives you one major advantage over a similar business operating as a sole proprietorship: flexibility. Because the money is made, managed, and distributed by the LLC, you have more control over when and how you’re taxed. For example, if you generate $100,000 of revenue, you won’t have to pay taxes on that $100,000, necessarily. You could take $50,000 and reinvest it into the business, take another $25,000 to keep in your LLC’s account, then take $25,000 as personal payment, ultimately paying taxes only on the $25,000. Depending on how you make and spends money, this may be well worth the effort of establishing an LLC.
The Liability Benefits
Even more importantly, you’ll need to think about the liability protection that an LLC can offer you. After all, “limited liability” is in the name.
When you’re operating as a sole proprietor or a partner, you’ll be held legally responsible as an individual for just about anything that goes wrong in the course of operations. If you violate a contract with a client, they could sue you individually. You’ll also take on any business-related debts as an individual; if the enterprise fails, you’ll still be personally responsible for paying all those loans and debts back.
An LLC, on the other hand, exists as a separate legal entity. It can take on debts of its own, so if it ever closes, those debts will die with it (in many cases). It can also be held legally responsible as its own entity, protecting you and your personal assets in case something goes wrong in the business.
Other Types of Businesses to Consider
LLCs are a structural entity with many advantages, but they aren’t perfect for every organization. There are other business entities worth considering as well. For example, sole proprietorships keep things much simpler and may be advisable for small-time operations. On the other end of the spectrum are corporations, which provide even more liability protection than LLCs, plus extra perks like being able to raise funds through publicly issued shares.
Is It Worth It?
Let’s get to the bottom line: is it worth creating an LLC for your business? In many cases, the answer is yes. LLCs are easy to start and provide many advantages over sole proprietorships and partnerships. However, every company is different, and you should be aware that every legal structure has inherent strengths and weaknesses. The most important step for you to take is to do your research, learn the qualities of each entity, and choose the one that best fits your needs.