Though LLCs (Limited Liability Companies) are one of the most common business structures among entrepreneurs just starting out, do you actually know all the benefits you’re getting by using one? With the help of online incorporation services, it’s simple to manage your company using an LLC, but it’s also wise to know how to use this structure to its full advantage!
Benefits of an LLC
Maybe you run a small business out of your home, or you’ve always dreamed of owning your own business and you’re researching how to do it. Most entrepreneurs and small business owners choose to form an LLC for these nine reasons:
1. Sole Proprietor vs. LLC
If you’re the only one involved in your business, you may be wondering if you should remain a sole proprietor or file as an LLC. As a sole proprietor, if you want to name the business something other than your legal name, you’ll need to file a Doing Business As (DBA) form in your state. For taxes, sole proprietors just report profits or losses on their personal tax return.
An LLC is a bit more complicated. You’ll need to fill out forms to become a legal business entity with the secretary of state and pay filing fees. But having an LLC means your personal assets are protected since they’re officially separated from the business — which is not the case under a sole proprietorship.
2. Protect Personal Assets
Speaking of protecting assets…one of the key benefits of having an LLC is the protection provided for an entrepreneur’s personal assets by separating the corporation from the individual.
This means that your personal savings, car, home and more are protected from creditors if you accumulate debt or your company happens to get tangled up in a lawsuit.
3. Pass-Through Taxation
Tax advantages are another benefit of LLCs. Unlike C Corps, LLCs don’t subject a business to double taxation of profits on both the corporate and personal level.
LLCs have pass-through taxation, which means that profits and losses are reported on your personal tax return. This means you’ll only be taxed once, instead of having to file a separate state tax return on behalf of the company.
Having “LLC” at the end of your business name also adds credibility to your company, making it more attractive to prospective clients. Being an LLC shows that you have registered your business with the state and have accountability as a functioning, professional entity.
5. Appealing to Investors
Equally importantly, the structure of an LLC looks attractive to investors, which could help bring in needed funds for starting or expanding companies. With an LLC, only the business is liable for debts incurred, so owners (called “members”) don’t need to worry about their personal assets being at risk in case the business doesn’t produce returns.
6. Profit Distribution
With S Corps and C Corps, profits are required to be distributed in direct proportion to the company’s ownership share. With an LLC, profit allocation is more fluid. For example, if one member lent money to the company, they could get a higher cut of profits to reduce the debt the company owes.
7. Licenses, Permits and Regulations
“To operate legally, every business must be licensed. Depending on the type of business and its activities, it may need to be licensed at the local, state and federal levels,” explains Sammi Caramela in Business News Daily. Caramela also mentions that you may need specific permits to operate even if your business is legally registered.
For example, if you want to sell homemade cookies at your state fair, you may need to provide a copy of your business license and a permit that shows you made your goodies in an approved commercial grade kitchen. For a more detailed list of when you need a business license or permit, check out the U.S. Small Business Administration’s (SBA) website.
This is helpful if you plan to sell alcohol in a restaurant, or if you want to import or transport animal products or plants across state lines. You can also check out this blog from the SBA that discusses what permits are needed to charge state sales tax, whether you need a professional license (hairdressers, dentists, etc.) and some states that require a Home Occupation Permit if you run your business out of your home.
S Corporations and C Corporations have a variety of state regulations that they need to abide by, from board member meetings to articles of incorporation. That’s because S Corps and C Corps are meant for larger businesses, so their structure includes requirements for stock options and detailed leadership roles. LLCs give the owner/member more freedom to run a smaller business without worrying about too many extra pieces of paperwork.
9. Perpetual existence
LLCs can be separated from the owner/member and can continue to exist even after the owners sell their shares or die. “Perpetual LLCs last until they are dissolved, either voluntarily or involuntarily. For legacy planning, this is lucrative,” states George Lawrence in the Small Business Chronicle.
In contrast, he says, sole proprietorships have one owner that is the business…and that business ends when the owner either stops doing business or dies. So if keeping your business in existence no matter what happens to you is a priority, then you’ll want to choose an LLC entity.
Still not sure if now is the right time for you to file as a legal entity? Maybe you’re wondering if an LLC is the right legal entity for you.
With these and other questions, you can always contact our knowledgeable team at Incfile to discuss your business options. Incfile has helped more than 150,000 companies, and we have the experience to guide you on this journey toward becoming a legal entity. Our business formation packages include a lifetime of customer support, online access to your incorporation documents and your first year of registered agent service for free. We want to help you with the legal side of things so you can focus on making your business a success!