Why should I choose an LLC?
There are many benefits of an LLC. The LLC is in fact a fairly new legal entity formed specifically to protect the best interests of small to medium sized businesses. While there can be advantages to other forms of incorporation an LLC provides a host of benefits just not available to many companies who are just starting in other legal entities. Because of this the LLC is considered the logical choice for new businesses.
Benefits of an LLC?
- A limited liability company (LLC) has many advantages:
- Pass through taxation – under the current tax laws, the business profits are taxed at the member level, not at the LLC level (i.e., no double taxation).
- Limited liability – The owner or owners (members) are protected from liability for any debts or as a result of any liability of the LLC
- With “check-the-box” taxation, an LLC can elect to be taxed as a sole proprietor, partnership, S-corp or corporation, providing much flexibility.
- No annual shareholders meeting for shareholders. Although in some states such as Tennessee and Minnesota this is not the case.
- Overall less paperwork and record keeping.
- Membership and financial benefits can be assigned as need be in the LLC’s operating agreement
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Limited Liability Companies (or LLCs) have become the most popular choice for small to medium sizes businesses when compared to corporations or partnerships. It can be described as a flexible form of enterprise that combines a partnership’s tax flexibility and a corporation’s liability protection. They are not corporations and the benefits of LLCs generally outweigh the supposed disadvantages and are typically unavailable to sole proprietorships and general partnerships.
LLC owners are typically not accountable for the business debts and liabilities of the LLC because it provides limited liability protection. Creditors cannot pursue personal assets, such as home or savings accounts, of the owners to pay business debts. Equally, in sole proprietorships or general partnerships, owners and the business are legally considered the same, which leaves personal assets vulnerable.
Also, an LLC can elect to be taxed as a sole proprietor, partnership, S-corporation, or C-corporations. A sole proprietorship is owned by one individual and has unlimited responsibility for losses and debts. A partnership allows for the sharing of profits and losses. An S-corporation does not pay any federal income taxes; instead income and losses are spread to shareholders who are then required to report that to IRS. These different options offer a great deal of flexibility. So, many typically do not pay taxes at the business level. Any business income or loss is “passed-through” to owners and reported on their personal income tax returns. Any tax due is paid at the individual level and not by the business itself.
Forming an LLC may help a new business establish credibility with potential customers, employees, vendors and partners because they see you have made a formal commitment to your business. When you operate through a limited liability company, your company name will be required to end with an LLC designation. With this title, customers will recognize that your business has ventured into smart business planning and invested properly into creating a legal entity for your business. The LLC title will distinguish your business from the many others operating as sole proprietors signaling that you are serious about your business.
The LLC laws are based on contractual flexibility and therefore allow members to establish any organizational structure agreed upon by the company owners, including right to profits and voting rights. LLCs can be managed by the owners (members) or by managers, unlike corporations which have a board of directors who oversee the major business decisions of the company and officers who manage the day-to-day affairs.
When forming an LLC you have the option to provide a wide-array of tax deductions for you and your employees. Even a one-person LLC or LLC incorporation can enjoy tremendous tax-deductible benefits such as health insurance deductions, travel deductions, automobile deductions, entertainment deductions, recreational facilities and many more. One of the most beneficial deductions is the pension plan or 401K. Money placed in a properly structured pension plan is tax deductible and the funds grow tax-free for retirement.