Limited liability companies (LLCs) are becoming increasingly popular among business owners. For a lot of these entrepreneurs, the structure of LLCs brings a lot of benefits to their companies. These are six reasons why you should form an LLC for your small business:
Numerous Tax Benefits
One of the most common reasons why entrepreneurs form LLCs for their businesses is the many tax benefits for the company and its owners get. Due to the default pass-through taxation arrangement of LLCs, the company usually does not pay corporate taxes like large corporations. Instead, the company’s income will be reported as part of the owner’s personal income tax return.
If the business owners do not want to pay the self-employment taxes, they may also elect to pass the responsibility of paying taxes to the LLC. However, they should do this as early as the formation of the LLC. In cases like these, the company can decide whether they want to be taxed as a C-Corporation or S-Corporation. This gives the owners the opportunity to decide which will give them more tax benefits.
As already mentioned above, LLCs provide limited liability protection for its owners. What does this exactly mean? Since the LLC is a separate entity on its own, it can file for loans and acquire assets. However, creditors will not be able to go after the personal assets of the owners.
This means that they cannot sue the owners if the company is unable to pay off its debt. There are, however, major exceptions to this rule. But generally, this is the typical arrangement in an LLC.
In comparison, partnerships and sole proprietorships put the owners at a high risk. Their personal assets are vulnerable from creditors especially if the business cannot pay the debt on its own.
Easier Estate Planning
Estate attorneys are able to put LLCs in a living trust. Because of this, planning an estate will be much easier and efficient. It also provides tax benefits for the estate. A family LLC, for example, can help decrease the estate taxes that children have to deal with when they receive their inheritance. Distribution of the inheritance will be also less costly because there will be lesser gift taxes.
However, those who want to establish an estate have to tread this topic lightly. It is highly complicated so a qualified lawyer should explain the process well to the client.
Flexible And Versatile Management Structure
LLCs allow the owners more freedom with regards to how they run the company. The owners can agree on a management structure that will work in the best way for the business.
The two most common arrangements are owner-managed LLCs or manager-managed LLCs. Owner-managed LLCs value equal voices of the owners while manager-managed LLCs pass the task of taking care of day-to-day affairs to managers.
Improved Business Credibility
If a business wants to be more credible in the eyes of its partners, networks, and suppliers, converting into an LLC will help a lot in that. LLCs are generally considered as more credible because they see that the owners are bound to their companies as they have made formal commitments to it.
Lesser Restrictions On Ownership And Compliance Requirements
Compared to corporations, LLCs have fewer restrictions on ownership. This is especially true on the matter of who can be an LLC owner, which is quite challenging with corporations. Unlike S-Corporations, there are also fewer guidelines on how many owners an LLC can have.
As to compliance requirements, LLCs fare better when compared to both S-Corporations and C-Corporations. For one, there are much less annual requirements that are mandated by the state.
Creating LLCs also require less paperwork. In fact, the process in some states only entails the payment of fees, filing the articles of organization and making annual filings. This makes everything easier for a busy entrepreneur.
That said, LLCs does not mean that owners should be less dedicated to their job of ensuring that the business flourishes. It is best that the owners draft an operating agreement to guide how the company will be run.
These are some top reasons you should form an LLC. So, once you decide to form an LLC, you need to know how to get LLC approval from your state. In addition to that, you need employer identification number (EIN). The good news is that you can apply for your EIN number online. So, get started with your LLC and have all the benefits of running an LLC.