LLCs have become a popular business structure for small business owners in the U.S. What makes this entity so appealing?
With unemployment numbers fluctuating, it has become even more important that you carve out your niche and secure your future. Starting your own business means you take charge of your tomorrow, create more opportunities for yourself and residents, and affords you the opportunity to give back to your community in the form of the products or services you offer. Because of its many benefits to business owners, the LLC formation is a favorite choice for startups, sole proprietorships and other business ventures. Before getting into its perks let’s recap what an LLC is.
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What exactly is an LLC?
LLC stands for Limited Liability Company. This business structure is a legal form of business, recognized on both federal and state levels. Possibly the biggest drawing card is that an LLC separates personal and business goods, making it a good way to protect your personal assets like your home and bank account in the event of the business failing or possible legal disputes.
Here’s why you may want to consider an LLC:
This business structure is less complicated and easier to form than corporations, who have a range of formalities that corporate managers must observe. LLCs have less paperwork and expenses, and don’t have to abide by red tape like holding regular shareholders’ meetings or keeping minutes.
- Owner flexibility
The “owners” of an LLC are called “members”, while the persons who are managing the company are called “managers”. An LLC allows for an unlimited number of members. However, if an LLC has just one owner, it will be taxed as a sole proprietorship (single-owned business). Management is also quite flexible. LLCs can opt to be managed by:
- its members (member-managed), which allow all owners to share in the business’ daily decision-making, or by
- managers, who can either be members or outsiders (manager-managed). This is useful, if for example, you need to employ an outsider in the event the company’s members do not have the necessary business skills or experience.
3.Flexible tax treatments
LLCs are often treated as “disregarded entities” and can choose to be taxed as a:
- sole proprietorship (single-owned entity where the owner is legally responsible for its debts),
- partnership (a business association of two or more individuals) or
- S Corporation ( this is not a type of business entity, but an IRS classification where owners pay income tax and self-employment tax on a predetermined salary).
Choosing how to be taxed provides the company with the option of being treated as a pass-through entity. For more information on taxation for LLCs go to the IRS website.
A pass-through entity means members do not have to file a corporate tax return. Instead, they report their share of profit and loss on their individual tax returns. This differs from corporate taxation, in which the profits are taxed at both the corporate level and on the owners’ tax returns.
- Stepping stone
What do you do when your business grows to an extent that an LLC is no longer the appropriate form? Easy. Small companies typically start out as LLCs, outgrow the form and then transfer the assets to a corporation with the same owners as the LLC. However, converting business forms requires legal expertise and is best done with the assistance of an accountant and attorney. A prime example of a company that started out small is Amazon.com, who started out as an online bookstore in a garage. Today, this giant has many subsidiaries in different states operating as LLCs, allowing them to take advantage of the tax benefits offered by each state.
- Enhanced credibility
An LLC, as opposed to a sole proprietorship, enhances the credibility of your business, making you more appealing to potential customers, banks (for loans and other forms of credit), and investors.
- You choose where to form your LLC
Most startups choose the state where they are based to form their business. However, the LLC formation can be set up in any state, regardless of whether you plan on doing business there or not. Keep in mind that each state has different laws, and should you decide to form your business in another state, you will have to register it as a “foreign LLC”, which can potentially increase your formation and administration costs.