[This article was written by Gladis Gomez.]
There’s no denying that being a business owner is a difficult path to follow, often filled with rejection. But, we applaud your determination to create something from the ground up. Chances are you’re here because you don’t know if a Limited Liability Company (LLC) is the right next step for you. If your business is a sole proprietorship or partnership, then it’s in your best interest to transform it into an LLC.
An LLC allows your business to have similar benefits as a corporation while enjoying more flexibility in terms of structure and the division of profits. Moreover, you would continue to run it as a small business. There are many other types of business entities to consider as you move forward into the next chapter of your business. Keep reading to learn the benefits of starting your own LLC.
By having an LLC instead of a sole proprietorship or partnership, a wedge will be driven between you and your business. This would ensure that your personal assets are no longer tied to the company. LLCs protect your assets, such as bank accounts, properties, cars, and investments. Moreover, if members or employees bring harm to your business, your personal assets will not be at risk. If a lawsuit were to emerge against your business, your personal assets will also not be touched. This also guarantees business debts remain separate from what you own outside of the company. Under an LLC, business owners would not be required to finance business debts with their personal assets. Additionally, debt collectors will only have the ability to collect from your business and nothing else. This form of security will continue as long as your business continues to operate legally. In short, an LLC protects you from experiencing financial loss and setbacks in your personal life. As a business owner, consider opening an estate plan option, such as a trust fund to further safeguard your assets.
2. Tax Advantages
LLCs have numerous tax benefits, including pass-through taxation. The pass-through method allows profits to be sent straight to the owner or members of the business without having to pay corporate federal income taxes on them first. Instead, earnings and losses are directly reported in the member’s personal income tax returns. Due to profits being separately taxed, double taxation is prevented. In contrast, C corporations don’t block double taxation from occurring and require taxes to be paid on all income made. An LLC helps your business avoid this at all costs and ensures your company continues to make money.
Another important tax advantage to take into account is how flexible an LLC is. The Internal Revenue Service (IRS) allows business owners to decide how they want their business to be taxed. There are numerous tax options available, including a sole proprietor, partnership, S corporation, and C corporation. It’s important to note that LLCs with multiple members cannot be taxed as sole proprietors. If you have multiple owners in your LLC, make sure to file IRS Form 8832 otherwise, you will pay taxes as a partnership.
3. Less Paperwork and Maintenance
Forming an LLC is a fairly easy and inexpensive process. LLCs have much simpler forms to submit. One of the most common requirements, and most often the only one, is to file an Article of Organization or Certificate of Formation. The documents outline the details of your business, such as name, date established, owners, and type of business to ensure proper record keeping. Make sure to check the expenses in the state you’ll be conducting your business in. Each state has its fees, laws, and regulations you need to be aware of. For example, in California, filing the Articles of Information and a Statement of Information costs a total of $90, and this doesn’t include the $10 fee to register your business name. On the other hand, a Certificate of Information in Texas costs an outstanding $300. Although the fees could be surprising, it’s a small price to pay considering all the benefits received from an LLC.
After all the paperwork is submitted maintaining your LLC compliant and orderly is not difficult. Unlike corporations that have substantial reporting requirements, LLCs are not required to file reports annually or have annual shareholder meetings.
4. Flexible Management
One of the biggest advantages of an LLC is flexibility. In an LLC, members have the option to manage all aspects of their business or they can opt to have managers in charge of their company. Note that members can also become managers. This is useful for those who want the benefits of being part of an LLC and owning a business but don’t have the experience or don’t want to take on the responsibility. Either way, members are responsible for ensuring the overall financial health of their business.
The flexibility of LLCs is considerably different from corporations. Corporations are required to establish a board of directors to oversee management of the business. Additionally, directors on the board need to be annually elected by shareholders.
If you decided to move forward with forming an LLC, congratulations! Here’s a short step-by-step guide:
- Register the name of your business: The name of your business should be unique to guarantee it’s not in use by other businesses. You can check local directories that belong to the state you’ll be conducting business in. The legal name of your business must also include Limited Liability Company or LLC.
- Appoint a registered agent: The registered agent will be the person that’ll receive official correspondence in the name of the LLC.
- File articles of organization: This crucial document is sent to your Secretary of State. Once it gets approved, your business is now an LLC.
- Get an employer identification number (EIN) from the IRS: Any business in operation needs to have an EIN. It’s important to do so for tax purposes.
- Formulate an operating agreement: An operating agreement defines the responsibilities of LLC members. It should include important details, such as how profits are to be distributed, how members can leave the LLC, and the duties of each member.
The Bottom Line
There are many ways to start a business, each with its benefits and advantages. However, an LLC provides structure and stability to those who are just beginning their entrepreneurial journey. LLCs are one of the most popular ways to establish your business for a reason.
Gladis Gomez holds a B.A. in Creative Writing with an emphasis in fiction and poetry. She proudly received her education at the University of California, Riverside. Shortly after graduating, she entered the world of marketing and fell in love with copywriting. She has been happily doing it ever since, currently writing for 365 Business Tips. In her free time, she enjoys cuddling with her dog, reading a good book, and traveling.