Choosing to form an LLC comes with numerous benefits, particularly over some of the other available business structures. Simply put, LLCs tend to have a range of advantages from taxes to asset protection to privacy. Explore some of the key advantages of LLCs to help you decide if this is the ideal structure for your business entity.
The Corporate Veil
Compared to a corporation or a sole-prop, a limited liability company provides the advantage of having a corporate veil. In other words, creditors of an LLC are not able to try to pursue your assets to pay for debts or make payments in the case of a lawsuit or accident. With a sole-prop, your assets are always at risk from creditors and lawsuits, giving businesses of any size a good reason to consider a different structure.
When you choose to form an LLC, you will also be able to take advantage of reduced taxes. The latest updates to the tax code during 2018 mean that the IRS favors LLCs in ways that sole-proprietorships will never see the benefits of. It is possible to reduce things such as income taxes, and government payments like Medicaid and social security by opting for the LLC structure over a sole-prop.
The tax benefits are also obvious when you compare an LLC to a corporation. Corporations are subject to "double taxation." Essentially, the corporation has to pay a corporate tax on its profits. Then, the owners or shareholders have to pay their own personal income taxes on their portion of company profits. This results in having to pay taxes on the same profit twice.
By contrast, LLCs use pass-through taxation, which eliminates the possibility of double taxation. Pass-through taxation means that LLCs themselves do not pay any taxes. At the most, they report their profits to the government so the IRS is able to confirm LLC owners report the appropriate taxes. Since there are no corporate taxes for LLCs, owners of any limited liability company only pay taxes on the profits once - on their personal income taxes.
In addition to the ability to reduce taxes, LLCs even have greater tax flexibility than corporations. If you have a corporation, it must be taxed in the form of an S- or C-Corp. By contrast, LLCs can change their tax designation to one of these structures. Or they can stick to the partnership or disregarded entity designation. The flexibility lets you select the tax designation that delivers the greatest savings in your particular situation.
You can also think about the benefits of an LLC from the perspective of your reputation. Forming an LLC tends to give off a more professional impression than running a sole-prop. Knowing that you put in the effort required to form a company indicates to vendors and clients alike that you are serious about your business. This gives them more faith that you will do what you can to last in the business world and seriously considered starting a company instead of just doing so on a whim.
LLCs even have benefits over corporations in regards to the required governance structure. Corporations have requirements to have their own board with directors as well as shareholders and officers. At the very least, a corp needs a President plus a Treasurer and Secretary. They must also hold frequent meetings with minutes, with those minutes accessible later. By contrast, LLCs can have just members or managers and they only need a single annual meeting. These reduced requirements save time and provide flexibility.