The way you choose to legally structure your business impacts how you’ll receive income, how decisions are made, and how you pay taxes.
From a sole proprietorship to a corporation to a limited liability company (LLC), there are several business entities to choose from. How do you know that an LLC is the right choice for you?
Keep reading for a more in-depth look at the advantages of an LLC.
What is an LLC?
An LLC – limited liability company- is a legal business structure where the owners are not personally liable for the company's debts or any other liabilities. Limited liability companies are hybrid entities that combine the characteristics of other entities like a corporation, partnership, and sole proprietorship.
What are the Benefits of Starting an LLC?
LLCs are the most popular business entity to form and for good reasoning! Here are some of the most common reasons to start an LLC.
Limited Personal Liability – When you properly form an LLC, you’re protected from the liabilities and creditors – and that’s why most people form an LLC.
Tax Advantages – As with any business entity, you can deduct or write off your legitimate business expenses from your LLC’s income. This can significantly lower the profits reported to the IRS and help you in the long run.
Flexibility – LLC members often have the freedom to customize their LLC dwellings. This means an LLC can elect management flexibility and also choose tax flexibility because the LLC itself doesn’t pay federal income taxes.
Privacy Protection – Some states allow business owners to form an Anonymous LLC for added privacy protection. Anonymous LLCs are formed to help prevent people from easily looking up (and finding) ownership information on the Internet.
Perpetual Existence – Other business entities, such as a sole proprietorship, cannot survive when the owner(s) pass away. LLCs have the capability of surviving and growing in the event of death or other major life events as long as the paperwork is filed correctly.
What are the Disadvantages of Creating an LLC?
Limited personal liability, tax advantages, and flexibility are all advantages that draw business owners into forming an LLC. However, like business decisions, there are also some disadvantages to take into consideration.
Formation Costs – If you’re a small business or entrepreneur just getting started, things can get pricey in the beginning. Many states have high startup fees and other requirements that cost money.
Riskier Than Corporations – Investors and lenders often consider LLCs a bigger risk than corporations. This could hurt your chances of getting loans accepted and growing your business.
Hard to Raise Capital – When you register your business, you should have enough capital to get it started, but keep in mind that LLCs can’t issue shares. When it comes to raising capital, business owners must get creative because growing your capital could get tricky.
Who Should Start an LLC?
An LLC business structure is often best for owners who want to have an unlimited number of owners and want a more flexible legal environment.
Most small businesses, entrepreneurs, and those that are self-employed consider the LLC business structure. While most businesses are allowed to form an LLC, laws state that non-profit organizations cannot. It also states that because of the daily risks, professionals such as lawyers and doctors are also not allowed to operate under LLCs.
If your business has co-owners or employees, you’re most likely to benefit from being an LLC. Without an LLC, your personal assets are at risk if your business is sued for something a co-owner or employee does.
You will also benefit from forming an LLC if your business has significant risks. Some types of businesses are at high risk for failure, have both financial and liability risks.
How a Business Lawyer can Help
A question often asked when forming an LLC is, “Do I need a lawyer?”
No, you do not need a lawyer to set up an LLC. However, there are many benefits to working with a lawyer that you may want to consider.
Owners of an LLC are protected from liabilities and creditors only if the LLC is properly formed with the right documentation and operated accurately. Lawyers provide written guidance on how to operate an LLC correctly so that the liability protection is not compromised.
A business lawyer can also save you time and money and handle the items you may not have considered. For instance, lawyers can help with things such as creating an LLC Operating Agreement and Articles of Organization. They’re also your best advocate for keeping detailed records in the case of an audit or lawsuit.
Choosing to form an LLC is a big business decision that you’ll have to make based on your unique situation. Taking these advantages and disadvantages into consideration will give you a more comprehensive overview of what this business decision entails.