There are several strategies to grow your business. However, one of the significant steps you need to take is to organize your business structure.
While there are numerous business entities you can choose from, forming a limited liability corporation (LLC) is a practical and popular option for small businesses.
In this article, you’ll learn the basics of an LLC and several reasons why you should choose this type of business entity.
Understanding Limited Liability Corporation
LLC is just another type of business entity to protect business owners. It combines the simplicity of a sole proprietorship with the limited liability protection of a corporation.
This means your business is still easy to organize and manage while enjoying the same protection corporations have without corporate recordkeeping, board meetings, and complex paperwork.
These factors make LLC an appealing and flexible option for startups and smaller companies. However, it’s still best to learn the ins and outs of how this business entity works.
While forming an LLC is more flexible than other forms of business entity, individual state laws have different regulations and costs in forming and operating LLCs.
For instance, if you want to start an LLC in North Carolina, you’ll have to fill up a specific form and pay a USD$125 one-time filing fee, whereas other states require up to USD$500.
Four Reasons To Form An LLC
If you’re unsure if forming an LLC is the right decision, here are four compelling reasons to convince you.
1. It Limits Your Personal Liability
Most starting businesses use an entity such as a partnership or sole proprietorship. While these entities can help establish your business, it comes with liability disadvantages.
With these types, you and your business are legally considered as one. This means that your personal debts are also your business debts and vice versa.
Significantly, if your employee or business partner is accused of negligence, your business and personal assets may be at risk. However, forming an LLC can limit this personal liability by legally separating your business from your personal finances.
So, even if you lose the money you’ve invested, your personal assets are protected from your business debts.
2. It Offers Tax Benefits
Unlike standard corporations, LLCs receive a ‘pass-through’ treatment by default. With corporations, profits are taxed as income and each shareholder also needs to pay income tax on dividends.
With LLC, however, profits and losses are passed through to each member’s tax return and are taxed at the business owner’s personal tax rate. It also means that LLC entities don’t have to pay federal corporate income tax, avoiding double taxation.
3. It Provides More Accessibility
As mentioned before, forming and maintaining an LLC is less complicated and have less paperwork than other business entities. In fact, you can form an LLC on your own without hiring an attorney.
However, if you want to make the process easier, you can also hire a professional service that handles the application and formation of your business.
Since you’re not required to have a board of directors, hold shareholder meetings or keep meeting minutes, LLCs have less paperwork to worry about. You don’t have to spend time and money maintaining records and filing compliance-related documents.
Best of all, LLCs are relatively inexpensive to create and maintain. The main cost you need to prepare is the state filing fee.
4. It Offers Flexibility
LLC is perhaps the most flexible type of entity available. For starters, LLC offers excellent ownership flexibility. It provides pass-through taxation without restrictions on the type or number of owners they can have, which isn’t the case for S corporations.
In terms of management, LLCs don’t have to use a formal structure as with corporations that consist of a board of directors and officers. Owners of an LLC have more choices and flexibility about the way they run the company and in making decisions.
Lastly, LLCs have better flexibility in terms of profit distribution to owners. With this type of entity, you’re not required to distribute profits equally or based on ownership percentages, as with corporations.
For instance, you and your partner may decide to have an equal interest in the company. However, you may also agree that one of you should receive a greater share of the profits since they contributed more effort or money during the startup phase.
Takeaway
If you haven’t created an LLC yet, now’s a perfect time. As you can see, starting an LLC can build instant credibility for your business while providing asset protection from lawsuits and creditors.
It’s easier to form and run, allowing your business to grow and take more risks, ultimately pushing it towards expansion and better profitability.
