The Benefits of Creating an LLC
If you are thinking about starting a company, you may be wondering how to best structure your business. You have numerous options:
Sole proprietorship
Partnership
Corporation
Limited liability company
A limited liability company, or LLC, is a business that combines certain aspects of corporations and partnerships. This entity has several benefits compared to its counterparts.
Limited Personal Liability
As its name implies, an LLC limits the liability of its owners. If you register your business as a sole proprietorship or a partnership, you and your co-owners could be held personally responsible for any business debts or legal payments. This means that your assets could be at risk.
With an LLC, however, the business itself, rather than the individual owners, is liable for its own financial obligations. For instance, if an LLC loses a lawsuit, the plaintiff could take some of the company's profits. However, the plaintiff won't get any of the owners' personal property, such as their houses and vehicles.
Tax Advantages
An LLC does not have its own classification for tax purposes. You can thus choose to have your LLC taxed as a sole proprietorship/partnership, a C corporation or an S corporation.
LLCs are automatically taxed as a partnership or sole proprietorship. This lets LLCs take advantage of pass-through taxation. A company that receives pass-through taxation does not pay business taxes. Instead, the business' income and losses are reported on the owners' tax returns, and the shareholders pay taxes on the company's profits.
LLC owners may prefer for their business to get taxed as a corporate entity. They can then change the company's Internal Revenue Service designation to a C corporation or an S corporation. A C corporation label is ideal for companies whose owners who want the profits to stay within the LLC. However, a C corporation also faces double taxation. The profits are first subjected to the corporate tax rate. Any dividends passed on to the owners are then taxed a second time. An S corporation, meanwhile, can take advantage of pass-through taxation.
Added Flexibility
Of course, you could simply structure your company as an S corporation to receive some of these benefits. However, there are some downfalls to this approach. An S corporation is not allowed to have shareholders from other countries. It also can't have more than 100 owners.
An LLC, however, has minimal ownership restrictions. In fact, most states only require an individual owner to be at least 18 years of age. That means an LLC owner can enjoy the benefits of pass-through taxation even if he or she lives outside the United States. You also can have as many owners as you want. You can even include a partnership or a corporation as a shareholder.
Owners of an LLC can similarly be flexible in how they allocate their profits. Corporations are required to distribute their profits to shareholders in proportion to their ownership of the company. An LLC, meanwhile, can choose to give more money to shareholders who contribute more to the business' success, even if they donât own a big share of the business.
Simple Setup and Compliance Regulations
Forming a corporation often requires lots of expensive paperwork. However, when you create an LLC, you donât have to fill out as many documents. An LLC typically has lower start-up costs compared to a corporation, as well.
Once your LLC is up and running, you only have to follow basic IRS and state regulations. You are not legally required to conduct annual shareholder meetings or appoint board members. Instead, you are free to run your business however you wish.
Setting up an LLC gives you the best of both worlds. You avoid the personal liability that comes with a partnership or sole proprietorship. You can also get the tax benefits of a traditional S corporation without having to worry about ownership restrictions. An LLC is thus a great option for those who are starting their own business.
