Choosing an entity for your business is an essential part of starting a business. One of the options, LLC (Limited Liability Company), is a hybrid corporate structure that combines the characteristics of both corporation and partnership or sole proprietorship. Because of its’ hybrid compilation, an LLC has simplicity, flexibility and tax advantages similar to a partnership. Also, provides liability protection like a Corporation for the partners. When you establish your business as LLC, the business starts as a separate legal entity; therefore, its’ assets are separated from the partners’ personal assets.
Therefore, an LLC might be the suitable alternative for people that operates a partnership or a sole proprietorship and need to have more protection from individual liability for debts, loans or lawsuits.
- First reason why you should form an LLC is that it provides limited liability to partners.
LLC’s provide their partners protection from liability, meaning, the members are not personally liable for debts and lawsuits incurred by the LLC. Therefore, generally, the partners can protect their assets (cars, bank accounts, investments, homes, etc.) from creditors of the company if there is litigation or bankruptcy.
- Second reason why you should choose to form an LLC is avoiding double taxation.
An LLC is considered as a “pass-through entity”, meaning that all profits and losses pass directly to the members, who then report their share of profits on their individual tax returns. For C-Corps, the profits of the company are taxed both before the distribution to the owners and after each owner report its share of profits on their individual tax return. However, the profits of an LLC are only taxed once as the owners’ income tax, without being taxed by the government on the company level.
Additionally, an LLC is not considered as a separate entity for tax purposes by the IRS. Therefore, the IRS does not tax the LLC directly on its’ initiation. Instead, the partners of the LLC get to decide how they want to be taxed.
- Third reason why you should form an LLC is, it is easy to register.
Initial paperwork and fees to form an LLC are relatively light, but it is important to keep in mind that the fees differ in various states. Additionally, LLC’s enjoy the freedom from many of the legal formalities that corporations must deal with. For example, annual reports, director meetings, and shareholder requirements. Residency is not required to operate an LLC; therefore, you do not have to be an U.S. resident to form an LLC. You can from an LLC from any part of the world.
- The last reason why you should form an LLC is management flexibility.
An LLC can have sole owner or multiple partners. Partners can be individuals or businesses, and there is no limit to the number of partners an LLC can obtain. Members draft a contract called the “LLC Operating Agreement” which contains the regulations of the company and the rules that govern the members of the company. With this agreement, the terms and regulations of each LLC can be customized to accommodate the specific needs and preferences of the business. Unlike corporations, which tend to be more structured, LLCs’ have fewer corporate regulations. For example, LLC’s are not required to hold a shareholders meeting or establish a board of directors as mentioned above.
How and where the LLC is formed-in will determine the extent of tax benefits and liability protection offered for the LLC. For instance, Delaware is one of the most popular states when forming an LLC, because of its’ predictable laws and corporation-friendly tax structure. You are also not required to disclose any information about the owners of an LLC to the State of Delaware. In Delaware, you only need to designate a person for contact and a Delaware registered agent.
In conclusion, there are multiple reasons to form an LLC, but before incorporating, you should consider what type of business you want to conduct and determine your business entity accordingly.