Small Business Brief

Business Advice

7 Advantages of an LLC and How It Can Benefit You

Are you launching a new business? Instead of the traditional options, why not launch it as an LLC?

LLC stands for Limited Liability Company. It’s a type of legal entity and business structure. As a separate entity, an LLC can have a unique tax identification number. It can also open bank accounts and do business dealings under its name.

But what are the advantages of an LLC and why choose an LLC for your business?

It sets itself apart from sole-proprietorship and corporation by combining the traits of the two. You can get some benefits from both entities this way.

Let’s dive into the benefits of this structure and see if LLC can be useful for you.

1. Personal Liability and Privacy Protection

One of the benefits of an LLC is in its name. It limits the personal liability of the members.

An LLC is a legal entity that’s separate from its owners. All legal liabilities and debts it accrues don’t carry over to their owners. They’re not personally liable for them. As a result, the personal assets of any member are not at risk.

This is different from a sole-proprietorship or partnership. In both of these cases, you and your business are the same entity.

As such, your business’ debt is also your debt. Creditors can seize your personal assets to collect upon your debt.

Moreover, owners can enjoy privacy, especially in Wyoming. In some states, the laws don’t require an LLC or corporation shareholder to disclose their identity. Find out why that’s beneficial for you here.

2. Easier to Set Up

If you only want the personal liability protection of a corporation but don’t want to go through the hassles of setting up one, get an LLC instead. You don’t even need an attorney. You can prepare the Articles of Organization yourself.

It can take as little as seven steps to form an LLC, and you can finish the whole process in an hour. It can take up to 4 hours, but that will depend on your organizational structure.

Depending on the state you live in, though, there may be more steps. Still, the overall procedure should be easier than a corporation.

Many states also allow a single individual to form an LLC, which is something you can’t do for a corporation. Some states demand at least two members to form an LLC, however.

3. Less Paperwork and Maintenance

Forming an LLC requires less paperwork and maintaining it is easier too. With corporations, you need to fulfill extensive requirements to keep it. For instance, you have to hold annual shareholder meetings, keep extensive records, and pay annual fees among others.

If you have an LLC, you’re not required to hold any annual meetings. You might not even need to file annual reports, depending on your state. You do have some annual obligations to fulfill, but they’re not as extensive.

This makes an LLC easier to maintain than a corporation. It reduces complications and corporate formalities.

4. Flexible Profit-Sharing

In an LLC, owners can get to decide how to divide their profits, which will be under their terms of the operating agreement.

This is not the case in other business entities. In partnerships, for example, partners must have an equal share of profits. Corporations must pay dividends based on the stockholder’s share of ownership interest.

An LLC member can elect to accept fewer dividends than another member if the other member has put more effort in money or labor even if they have equal interest. They’re not required to distribute the profits according to some rules.

5. Flexibility in Management

The management style of LLCs is flexible in that you’re not bound to a structure. You and the members get to decide how to run the show.

In contrast, corporations have a fixed management structure. Although they can have many structures, all these need three levels to be compliant.

The first level consists of shareholders who are the owners of the company. They control the business and they make decisions using their number of shares as votes.

The middle level has the board of directors (BOD). These are the elected representatives of stockholders. They manage the business.

Then we have the officers which usually include a CEO or President, a Vice-President, a Secretary, and a Treasurer. They are subject to the control of the BOD.

LLCs don’t have to subject to this formal structure. Owners have more flexibility in choosing how to run their business.

6. Tax and Accounting Advantages

An LLC doesn’t have a federal tax classification. You can choose to adopt the tax status of sole-proprietorship, C-corporation, or S-corporation.

By default, though, the IRS classifies LLCs as sole-proprietorships or partnerships. This gives an LLC the same pass-through entity status, which is one of the biggest advantages of an LLC.

This pass-through status means that the members will only pay taxes on their individual income tax returns. Any income that the LLC earns doesn’t get taxed until it passes through to the members.

It allows you to avoid double taxation, which is what traditional C-corporations face. They pay taxes on their profits, and then the shareholders pay taxes on their dividends.

The pass-through treatment also requires a much simpler method for tax accounting. The LLC doesn’t need to pay taxes as an entity; the owners will only need accounting for their personal tax returns.

7. Flexibility in Ownership

Pass-through taxation can also apply to S-corporations, but note that it has several ownership restrictions. You can’t have more than 100 shareholders. Your members must not also include any foreign shareholders or corporations.

These types of restrictions don’t apply to LLCs. You can enjoy pass-through treatment without a limit on the type and number of owners you can have.

Reap the Advantages of an LLC Now!

Now that you know the advantages of an LLC over sole-proprietorship and corporations, it might be time to decide the type of business entity you should set up. Don’t hesitate to check state laws to keep up with the process.

Running new businesses doesn’t end here, though. If you need more help, don’t hesitate to keep reading our blog posts. You might discover the tips and tricks you need today!