Do you own one of the 31.7 million small businesses in the U.S.? If so, you face a lot of choices including how to run and structure your business. Wondering what is structure is best for a small business?
Have you considered forming an LLC? The LLC benefits make this structure a great option and often a better choice than a partnership or sole proprietorship. Keep reading to learn why you should get an LLC for your small business.
What Is an LLC?
A limited liability company (LLC) is a structure owned by its members. Similar to a corporation, there is personal liability protection in case there is a business loss. An LLC is a unique hybrid of the flexibility of a partnership and the asset protection of a corporation.
LLCs are typically the best business structure for small businesses, but of course, it depends on your business. Here are some of the biggest benefits of an LLC for a small business.
1. Tax Advantages
You can get the best of all worlds when it comes to taxes. LLCs do not have a federal tax classification but can adopt various tax statuses of C corporations, S corporations, sole proprietorships, or partnerships.
Depending on how many owners you have, the IRS will automatically classify an LLC as either a sole proprietorship or partnership. You can take advantage of pass-through taxation, which means you do not have to pay corporate or LLC taxes. The LLC’s expenses and income pass go through the owner’s personal tax returns, so the owners will pay personal tax on profits.
On the other hand, traditional C corporations get taxed twice on distributions on both the corporate and individual levels. S corporations avoid this double taxation and can also get the pass-through taxation.
2. Easy to Form and Maintain
Another huge benefit of LLCs is that they are overall easier to form and have less paperwork for you to complete. Working with the best LLC registered agent, you can file a formation document like a Certificate of Formation or Articles of Organization.
You may also need to have an operating agreement for your business.
On the opposite side, corporates legally have to have an annual shareholder meeting and also file an annual report, maintain shareholder records, pay an annual fee, and record important business resolutions.
3. Limited Personal Liability
This is one of the biggest benefits of an LLC vs sole proprietorship. If you have a partnership or sole proprietorship, you and your business are legally the same. This means any business debts are also your personal debts.
And, it also means your personal assets are at risk if any employee or even your partner is accused of negligence. If you file for an LLC, you limit your personal liability because it legally separates the business from its owner(s).
The LLC is now responsible for its own obligations and debts, but you could still lose if you have money in the company. You won’t lose personal assets, like your home or automobile, to collect business debts, however. Your personal assets are also protected from lawsuits with your company.
4. Ownership Flexibility
LLCs also have fewer restrictions on the number of owners and also how the owners manage the LLC. There are also choices to be manager-managed or member-managed.
Corporations are required to have a board of directors elected by shareholders. An LLC does not have formal regulations and the owners have more choice on the management structure.
Ready to Become an LLC Member?
As you can see, there are many LLC benefits for your small business. It’s easier to file, less structure, tax benefits, and you have more flexibility.
Looking for more business advice? Check out our Business section.