One of the most important steps in launching a business is determining your legal structure. Whether you’re starting a business by yourself or with partners, you can choose to register as a limited liability company (LLC), which is one of the simplest ways to structure a business.
According to Legal Zoom, an LLC is a company that boasts flexibility, tax ease and legal protection because it combines some of the best elements of a corporation, sole proprietorship and partnership into one business entity.
The benefits of starting an LLC
An LLC is one of the least complex business structures because it offers flexibility by combining positive features of other business entities. LLCs provide the tax simplicity of sole proprietorships and partnerships, while boasting the limited liability protections usually provided by corporations.
[Read: Getting Ready to Launch? How to Choose the Right Business Structure]
Here are five benefits of starting an LLC:
Structure and ownership
Owners of an LLC are known as “members.” Depending on state regulations, members of an LLC may include individuals, corporations, other LLCs, foreign entities and more. There are no restrictions on the number of members an LLC can have, so it can be a single-member or multi-member entity. Single-member LLCs generally resemble a sole proprietorship, whereas multi-member LLCs resemble a partnership. However, an LLC may elect to be treated as a corporation.
Pass-through taxes
One of the biggest benefits of an LLC is that all profits go directly to the business owners. The owners file their share of the profits on their own individual tax returns, meaning the profits are only taxed once. This is referred to as pass-through taxation.
Corporations, on the other hand, must pay taxes twice — first when profits are distributed to the owners and again when they file their individual tax returns. For many small business owners, pass-through taxation is a financial benefit too good to pass up.
Legal protection
As the name suggests, members of an LLC have limited personal liability on their business finances. Unlike other business entities, owners of an LLC are known as “members” and are not held personally responsible for the business’s debts or lawsuits, so long as members don’t participate in fraud or criminal behavior.
Credibility
One of the less obvious benefits of forming an LLC is the added credibility you gain with clients, suppliers and lenders. LLCs are recognized as a more formal business than a sole proprietorship or partnership and shows you are a credible business.
Access to business loans
Finally, once you have formed your LLC, your business will start building a credit history that will help you access loans or lines of credit from lenders.
One of the biggest benefits of an LLC is that all profits go directly to the business owners.
Disadvantages of an LLC
The flexibility provided by an LLC has many benefits, but there are some downsides to this type of business entity. According to TRUiC, the three disadvantages of structuring your business as an LLC are:
- As a pass-through entity, owners are responsible for paying taxes on their share of the business’s profits, regardless of whether they are given a disbursement or not.
- The LLC must send K-1 forms to all members before they can begin to file their personal taxes.
- Many investors avoid funding LLCs to avoid K-1 forms.
Is an LLC right for your business?
An LLC is a popular option among small business owners because it provides the perfect balance between simplicity and personal asset protection. However, when you’re choosing what type of business entity your business should be, you need to carefully consider your options. An LLC is right for you if you meet the following criteria:
- You want to limit your personal liability for business debts.
- You want to raise capital from new business partners and investors.
- You want to avoid double taxation.
No matter which entity you choose, it’s important to select one that will grow with you. It can be difficult to change your business structure from a sole proprietorship or partnership to an LLC after you’ve already registered, so do your research and select the one that most benefits your long-term business goals.
[Read: The Step-by-Step Startup Guide: How to Start a Business]
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