You may be considering incorporating your small business as a Limited Liability Company (LLC). Whether you are just launching your business or have been operating as a sole proprietorship for years, there are significant advantages to switching to an LLC. Here are the top five benefits of an LLC.
Personal Asset Protection
This is the most appealing aspect of a limited liability company for many business owners. You have limited liability for business debts. Your personal assets are safe from creditors should your business fail or succumb to financial hardship. You are generally only held liable up to your investments in the business. Protecting your personal assets is one of the top five benefits of an LLC.
Another highly appealing benefit of an LLC is that owners can elect how they are taxed. You can either file your taxes as a disregarded entity or choose corporate taxation. A disregarded entity means you pay taxes on LLC profits as though it were your own personal income. If you choose corporate taxation your profits will generally be charged the beginning corporate rate of 15% for the first $75,000 of income. This is typically a lower rate than the personal rate imposed by the IRS. Tax advantages are one of the top benefits of an LLC.
One of the largest benefits of forming an LLC is that you can file taxes however you elect to do so, as mentioned above. However, this is especially beneficial if you start an LLC but elect to be taxed as an S Corporation. If you choose to do so, you can have more than 75 business owners, and any of these owners can be a nonresident alien, partnership or even a corporation. You can also have the benefit of flow-through business loss deductions, regardless of whether you own a virtual business or brick and mortar operation. If you are considering the benefits of starting an LLC, remember the added advantages available if you decide to be taxed as an S corp.
One of the benefits of an LLC is that it adds credibility to the business. It shows you have made a formal commitment to the business by incorporating as an LLC. It also helps if you are seeking foreign investment. Although limited liability companies are relatively new to the United States, they have been active abroad for over a century. Foreign investors are familiar with LLCs and may be more apt to invest in this form of business. Added legitimacy and credibility is one of the many benefits of an LLC.
Flexible Internal Structure
A further benefit of an LLC is that the business owner can decide how to manage the business. This is an interesting aspect that some business owners may overlook. Depending on your professional background, you might assume that all businesses must follow a rigid hierarchy of employees. This is certainly the case for a corporation, where professional roles must be clearly defined. In an LLC however, the owner can be involved in the day-to-day operations or hire managers to perform these tasks. One of the benefits of forming an LLC when you start your own business is that you, the owner, get to decide on its internal management structure.
The final advantage of an LLC is related to its flexible internal structure. In addition to having flexibility in its management structure, an LLC has less restrictions in general. There are few restrictions on who can be an LLC owner. For example, a business can have one owner or 75 partners. The owner of an LLC can be a nonresident alien. Ownership can be disproportionate, it does not need to be divided equally. This is attractive when multiple owners have different investment levels. Consider the fewer restrictions as one of the benefits of an LLC.
Incorporating as a limited liability company is highly recommended for small business entities. Owners can protect their personal assets and take advantage of flexible tax options. Management structure and internal organization are versatile. An LLC also adds legitimacy and credibility to a business, particularly those looking for foreign investment. Remember this post and the benefits of an LLC when deciding on the legal entity for your small business.
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