What are the advantages of forming an LLC?
If you are a sole proprietor, partnership or starting a new business, you should consider the advantages of forming an LLC (limited liability company). An LLC is private limited company business structure that combines the pass-through taxation features of a partnership or sole proprietorship with the limited liability of a corporation.
Why form an LLC?
This sounds great, but what does it mean? A properly structured LLC protects the owners (members) from the debts, liabilities and legal judgements against the business. Since the LLC owners do not have personal liability, their personal assets are protected in the event there is business liability. Until recently, only corporations offered this protection against unlimited personal liability exposure.
What are the other benefits of forming an LLC?
Asset Protection – As outlined above, one of the biggest benefits of forming an LLC is protecting one’s personal assets (house, savings, investments, cars, etc.) from creditors or a lawsuit. LLC members have limited liability protection. You can think of it as a way to have inexpensive insurance for your personal assets. Those who own real estate or rental property, should consider the benefits of forming an LLC.
Avoid Double Taxation – LLC’s do not pay tax at the business level. Instead, the income or loss from the business flows through to its members. Any taxes owed are paid at the individual level, and self employment taxes. This is significant when you consider that corporate profits have taxes on income at the corporate level, and taxes on distributions at the individual level.
Fewer Rules – Compared with corporations, LLCs have more flexibility and are easier to maintain. Annual board of director meetings and minutes are not required as they are for corporations. There are also fewer restrictions on who can be an LLC member.
Perceived Credibility – An LLC structure gives the appearance of credibility to those with whom you do business. This can be beneficial with acquiring new customers and establishing banking relationships. In addition, most investors won’t even consider supporting a company that is not an LLC or a corporation.
When to Avoid an LLC Structure
To form an LLC, Articles of Organization and an Operating Agreement must be filed with the state including payment of filing fees. To keep an LLC in good standing, an annual report with the state must be filed every year. Fees on LLC’s are generally higher than for corporations. Conversely, sole proprietors are not required to file formation documents with the state and is the least expensive structure for doing business.
Transferring Ownership – Ownership transfer in an LLC is restrictive, since it requires approval from existing owners. With corporations, transferring shares can be done very easily.
Venture Capital – If you have a business that plans to take on investors or sell to another company, then you may want to stay with a traditional corporation. With a C-Corp ownership can be easily transferred to others.
Retaining Profits – If you plan to keep profits within the company to maximize growth, then a C-Corp structure is your best bet. Corporate profits start at 15%, which is lower than the individual tax rate.
Best Option: LLC Taxed as an S Corporation
If you agree with the benefits of forming an LLC, and if you qualify, then consider taking it a step further and electing to be taxed as an S-Corp. This is arguably the best possible small business structure. The S-Corp election allows the LLC member to not have to pay self employment taxes, which is currently 15.3%. An LLC taxed as an S corporation combines the simplicity and flexibility of an LLC with the tax benefits of an S corporation.
Your next question may be on how to file your LLC tax return, which we have written about here. The information presented in the above post on the advantages of forming an LLC is general in nature, not legal advice and not warranted or guaranteed. Laws vary by state, so you should speak with a Certified Public Accountant or a trusted advisor to discuss your specific situation.
Did you find this post useful? If so, I would greatly appreciate if you commented below with your thoughts and shared on Facebook!
To your success!
Noel B. Lorenzana
Need solutions? Check out my Coaching page.
PS: If You Need Accounting, Tax or Business Advice, visit – CPA Tax Buddy.
If you enjoyed this post on Real Life Benefits of Forming an LLC (Limited Liability Company), please share, retweet and comment.