Are you planning to start a business soon? Have you decided the kind of legal entity it would be?
You have several options in front of you such as sole proprietorship, partnership, LLC, and a corporation as far as giving a legal structure of the business is concerned.
One legal structure that is gaining huge popularity among entrepreneurs these days is an LLC.
Called Limited Liability Company, an LLC gives many advantages over the other types of legal entities while avoiding their drawbacks.
What are the benefits of starting an LLC in 2020? Let us find out.
Benefits of starting an LLC in 2021
Here are a few quick links to help you navigate:
- You get to call all the shots
- Your liability is limited
- Flexible profit sharing
- Less tedious documentation
- Flexible & nominal taxation
- Business name protection
- Ease of doing business
- Simple record-keeping & full control
- LLC related FAQ
What are the Benefits and Advantages of an LLC Compared to Other Legal Entities?
Let’s get right into the main points.
1. You can call all the shots
If you are the entrepreneur, it is your baby and you have all the rights to run the show as per your desire.
In most states across the nation, you have the right to create an owner LLC which is a single-member LLC.
It means you have the freedom to take decisions of the business without consulting other partners (well, there aren’t any, isn’t it?).
There is no board of directors to create an impediment or roadblock which is the main drawback of a corporation.
You are as free as the owner of a sole proprietor firm.
But wait, you don’t have to face the consequences of a decision gone wrong as your liability is limited as the owner of an LLC.
Isn’t it wonderful to have the freedom of a sole proprietorship while enjoying limited liability in case of a big loss to the business?
This is why you should consider forming an LLC if you want to call all the shots in your business.
You can still run the show if there are more owners by getting the agreement written in such a way that the roles and responsibilities of all the owners are fully defined and demarcated.
2. Your liability is limited (obviously)
One of the biggest benefits of forming an LLC as against sole proprietorship is that you can save your skin in case of a loss to the business.
You have limited liability like that of a shareholder in the case of a company listed on the market.
You are not held accountable for the debts of the business or its legal liabilities which is what happens if you are the owner of a sole proprietorship.
Creditors cannot ask for the recovery of their money through the sale of your assets like a home or a car.
You can get away from them by paying what is your limited liability as an owner of the LLC.
Creditors can’t touch the money kept in your bank account when you are the owner of an LLC.
However, you can still be made to pay from your assets if you have agreed to become the guarantor for a debt from a bank.
Your liability is limited to the capital you raised for the formation of this legal entity called LLC.
3. Profit-sharing is flexible
What does it mean to say that there is flexibility in sharing profits when you are the owner of an LLC?
In most cases, profit sharing is done based on capital raised by different owners or based on fixed percentages decided beforehand.
For example, if it is a partnership firm, profits will be shared equally among the partners.
If it is a corporation, profits among the shareholders are distributed based on the number of shares held.
It is in the case of an LLC that the members have the flexibility to share profits according to their liking.
The members don’t need to share profits in the proportion mentioned in the operating agreement.
One member becomes eligible for a higher percentage of profits when he or she puts in extra hours of work or looks after more responsibilities than the other member.
There is another way in which LLCs differ from other legal entities. The regular profit-sharing arrangement of an LLC is suspended when the liabilities of the LLC exceed or are equal to their assets.
It is easier to prove in front of the IRS that profit-sharing done in contravention to the operating agreement in case of an LLC is not to take any undue tax advantage but reflects a certain economic situation.
4. Less tedious documentation
This is an advantage of LLC that you will love if you hate too much legal documentation.
You will find yourself doing much less paperwork if you create an LLC than when you form any other type of legal entity.
The information required for setting up an LLC is so basic that you probably give more information to Facebook and other social media platforms for making an account.
Imagine being asked just the name of the LLC, its location, the details about its owner or members, and any other basic information deemed necessary by the concerned state where this LLC is being formed.
Before the registration, you also need to spell out articles of the organization and pay a small fee required by the state authorities.
If you are even thinking of setting up a corporation, you would be surprised to learn that there is so much work associated with its formation.
Besides giving articles of incorporation to the state authorities, you have to stay alert to the requirements related to statutory limits imposed by the government.
A formal meeting of the members has to be organized to elect the officers of the corporation.
These officers draft the classes of shares that are allotted to the shareholders.
The corporation must draft the laws that spell out how the management will work.
Even after registration of the entity, the corporation must organize formal meetings of the board of directors to discuss important business matters and policies.
In cases of emergency, these meetings are called at very short notices.
Corporations are required by law to hold annual meetings and whose minutes are made available to the shareholders and also the general public.
But no such meetings are required by LLCs that are formed in the state.
5. Taxation is nominal and also flexible
You are going to remain free from the worries of taxation when you create an LLC.
In this respect, you enjoy little taxation like a sole proprietorship as the IRS considers an LLC as a disregarded entity.
What does it mean by the disregarded entity?
It simply means that the LLC is not required to pay or even report its taxes to the IRS.
You will be happy to learn that the profits and losses of the LLC get passed to the incomes of the members or owners’ income tax returns.
Imagine paying taxes at individual rates and enjoying the profits of a big company. Pay taxes of the LLC as if you are a self-employed individual.
For example, let us assume that you set up an LLC with 2 friends and the profit for your business in a given year is $90,000.
When it comes to taxation, you are not asked by the IRS to pay high taxes like a corporation.
Instead, you can share the profit equally among the three members and each one of you can pay tax on the income of $30,000 as if you are filing individual tax returns.
If you want, you can pay taxes like a corporation even when your business entity is an LLC.
There are two ways of paying taxes like a corporation. You can either deem your LLC as a C Corporation or an S Corporation.
But even here the taxes for the LLC are low and only applicable as Medicare and Social Security taxes.
6. Protection of your business name
One big concern of companies these days is that their competitors try to copy their name or logo when their products or services become popular among the customers.
But you can forget your worries on this count when you form an LLC in a state as no other business can use your name to sell or remote products and services similar to yours.
You can be reasonably sure that no one can use your name or anything similar to it to try and lure your loyal customers if you choose to structure your business as an LLC.
If you want to safeguard the name of your company on a national level, all you have to do is to form an LLC and then apply for trademark protection.
This step would make sure that your business name gets protected in all 50 states of the country.
7. Ease of doing business
When you are planning to do business, it is necessary to give some time to its legal structure.
The type of effort that goes into maintaining different legal entities is different.
It is in the case of an LLC that you get to enjoy limited liability like a corporation without the requirement of maintaining records like a corporation.
If you want to carry out your business freely without any worries of legal formalities, creating an LLC is the best option for you.
Also, the cost of maintaining an LLC is much lower than other legal structures of a business.
The start-up cost and the paperwork required in setting up an LLC are perhaps the lowest among all kinds of legal structures.
8. Enjoy the simplicity in record-keeping & control
If you love simplicity in everything in life, why should your business pose difficulties for you through its complications?
Limited Liability Company is not only simple in its creation but also simple in maintenance.
The next aspect to keep in mind is your ability to control the business.
If you want total control with no interference from others, LLC is the best structure for your business. There are no CEOs and CFOs to consult when deciding the policies of the business.
You don’t have to keep in mind the interests of the shareholders which is the case when you are running a corporation. Just draft the operating agreement and file the Articles of Association and you are ready to start your business as an LLC.
No shareholders meeting and no AGM of the Board of Directors to take policy decisions.
If your business is an LLC, you are free to run the show on your own like a sole proprietorship.
Benefits of an LLC related FAQ
What are the benefits of owning an LLC?
Some advantages include:
1. Limited liability for managers/members
2. Higher protection (charging order)
3. Management is flexible
4. Members are taxed on their own personal taxing level
5. Superior privacy protection
What is a downside to an LLC?
In some situations, owners and members of an LLC might end up having to pay more taxes than owners of other legal entities.
This is due to the fact that profits of LLC’s are subject to social security, medicare, and self-employment taxes (currently at 15.3%).
Is it worth getting an LLC?
I’d say yes, certainly. But it really depends.
One unique benefit is the protection of your personal assets since the liabilities to the business’s resources are limited.
In addition, having an LLC protects your personal assets from lawsuits and claims against the business.
Is an LLC better for taxes?
You certainly could say so due to pass-through taxes. LLC owners don’t need to file corporate tax returns.
Thus, there’s no such thing as “double taxation” for you. In an LLC, only the owner(s) will be paying taxes, not the business.
Wrapping up the benefits of an LLC
Many individuals are confused about whether it is possible to make an LLC when they are the only person setting up and running the business.
These people have heard about sole proprietorship as the way of doing a business. There is no need to have a few members or owners when setting up an LLC.
You can very well create a single-member LLC. Of course, it is easier to set up a sole proprietorship as there are a few more steps involved with an LLC.
But when you take a closer look at the benefits of limited liability and the freedom to call the shots, you would agree that it is worth taking the pains to set up your business as an LLC.
Every business carries a certain amount of risk of failure, and LLC is no different from other types of businesses in this respect.
You cannot control the chances of success and failure in a business but you can certainly reduce your liabilities in case of a big loss or failure in your business.
What better than to fix your liability to the level of capital raised by you in setting up the business which is the case with an LLC.
Your creditors cannot touch your assets like property or car if your business fails or suffers a big loss.
The level of protection you get from personal debts in an LLC is the same as in a corporation but it is much easier to set up and run the LLC than a corporation.
There are different ways of incorporating a business entity and an LLC is one of them. It blends the advantages of a corporation without asking the business to undertake as many responsibilities.
Enjoy the freedom of a sole proprietorship and avoid the high taxation and complicated procedures of operations that apply to a corporation.
The best part of running an LLC is of course the feature of limited liability that allows you to save your assets in case of a failure or loss.