Did you know that there are 37.1 million small businesses in the United States? While that number encompasses businesses of every type, LLCs make up a larger portion of it.
The decision to form an LLC is a big one. There are a lot of steps involved and the entire process can feel a bit overwhelming at first. If you’re deciding whether or not to form an LLC of your own, though, we’re here to help.
Read on to learn seven of the biggest benefits of an LLC.
1. Separation of Finances
If you’re currently running under a sole proprietorship or a partnership, you and your business are legally bound together. What does this mean for your finances, though? It means there’s no line between business and personal.
If you’re a sole proprietor and your business is in debt, then it becomes your responsibility to have everything paid off. If you’re the owner of an LLC, then you have limited liability for the business’s decisions.
Basically, the owner is not directly responsible for any debts or potential legal fees — the business is.
In short, forming an LLC helps ensure that if something goes wrong, you’re not having to drain your personal savings account to make sure it’s taken care of.
2. Tax Advantages
Since LLCs don’t have their own tax classification, they can adopt the tax status of sole proprietorships, partnerships, S corporations, or C corporations. The IRS usually classifies LLCs as sole proprietorships or partnerships, which allows business owners to take advantage of pass-through taxation.
What does this mean, though? Basically, your business isn’t subject to income tax. As a business owner, you’re taxed directly and individually on any income your business earns, taking into account your share of any profits and losses.
This helps you avoid double taxation.
3. Less Formality
Often, S and C corporations come with formalities like a mandatory annual shareholder meeting or tons of paperwork to file annually. While LLCs do have paperwork, it’s not nearly as much as corporations have to deal with.
LLCs also don’t have to hold annual meetings and not usually subjected to extensive record keeping. In some states, they don’t even need to file an annual report.
If you have an LLC that’s formed as an S corporation, you do have to file your taxes under that formation, but they’re not subjected to any corporate taxes in the process.
4. Flexibility in Ownership
S corporations actually have limits when it comes to the amount of ownership they’re allowed to have. They can’t have more than 100 shareholders, can’t include foreign ones, and can’t have shareholders that are also corporations.
Having an LLC doesn’t come with this restriction. In fact, there aren’t any restrictions on the number and type of owners they can have, though the number of employees they can have is capped at 500.
5. Record-Keeping and Costs
While an LLC offers the same limited liability that comes with a corporation, the levels of record-keeping aren’t nearly the same. Though you don’t have the same level of personal financial protection that you might with a corporation, the amount of operational ease you receive makes it well worth it.
The same goes for startup costs and even annual fees.
The registration fee is often smaller for LLCs than they are for corporations, and they don’t come with as many annual fees if any at all.
It is good to note that in some states, LLCs may be required to dissolve and re-form with a new membership if a member joins or leaves. To avoid this potential pitfall, it’s wise to place an agreement within the buying, selling, and transferring ownership of the LLC.
6. Flexible Profit Distributions
LLCs also have flexibility when it comes to how their profits are distributed. They’re not required to distribute them according to ownership percentages or even equally. LLC distributions are customizable based on profit and many other factors.
Three people might have equal interest and ownership in an LLC, but that doesn’t mean they automatically receive the same amount of money. One person may have invested more money and time into the business during its formation, and that means that they’re able to receive a greater share of any profits their business might make.
This differs from shareholders, which must distribute their profits based upon the number and types of shares they hold.
This simple and adaptable business structure makes it perfect for a large number of small businesses.
7. You Make the Calls
The biggest benefit, by far, to owning an LLC is being your own boss. While corporations often have a fixed-management structure with a board of managers that oversee the company along with officers that run the day-to-day business, LLCs don’t. There’s also that annual shareholder’s meeting we talked about earlier.
By avoiding this, you also get to call the shots and play the part of the CEO (well, you and the other owners if there are any).
As a single-member LLC, you are the sole owner of that business and you don’t have to consult others for basic decision-making. You have all the freedom of a sole proprietorship without the financial worry and stress that may come with it.
Remember the Awesome Benefits of an LLC
Remembering the benefits of an LLC is going to not only make your decision now but help you remember why you made the decision in the long run. Forming any kind of business is a tough process to take on, but forming an LLC can make it that much easier in the long run.
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