LLCs were first created in Wyoming in 1997. Today, over two-thirds of all new companies are formed as Limited Liability Companies. There are now more advantages than ever before for business owners considering switching to a Limited Liability Company.
In this post, you’ll learn all about the benefits of an LLC, how you can set up your own LLC, and whether this is the best move for you.
Ready? Let’s get started.
What is an LLC?
An LLC or limited liability company is a type of business structure that combines the liability protection available to corporations with the tax advantages, flexibility, and simplicity of a partnership. This business structure is easier to establish than a corporation and is also simpler to maintain.
Under the GOP tax plan, there are even more benefits to turning yourself into an LLC. LLCs provide flow-through which prevents double taxation. Luckily, there’s plenty of information online so you can read more about the differences between operating as a sole proprietor, LLC, or corporation.
What Are The Benefits of an LLC?
While there are a few costs involved with setting up an LLC, the benefits will often make it worthwhile. Here are the main benefits associated with forming an LLC:
Limit Your Personal Liability
If you’re operating your business as a partnership or sole proprietorship, you and your business are legally considered to be the same “person.” This means that if you incur any business debts, these are also considered your personal debts. This is especially risky if you own your own home. If you your employee or your business partner are accused of negligence you could lose your personal assets.
When you operate is an LLC, your assets are protected. That’s because LLCs are legally separate from their owners. If you’ve invested money in your company this can be lost, however, any personal assets such as your personal bank account, your home, or your car, will remain protected.
Enjoy More Credibility
These days, almost anyone can claim to be an entrepreneur. But if you’re registered as an LLC, it shows that you’re serious since you’ve invested in your company.
This gives you an advantage over your competitors, especially if they’re still operating as sole proprietors.
Make the Most of Tax Benefits
Forming an LLC is a great way to minimize your tax liability. Since the IRS doesn’t consider LLCs to be distinctly separate entities, LLCs are not taxed directly. Instead, you get to choose how you want to be taxed.
You may choose to be a single member LLC. The structure is similar to sole proprietorship and taxed the same. Losses and profits from your business aren’t taxes directly, and you’ll instead use your personal federal tax return.
If you have other business partners, you may choose to be treated like a traditional partnership when it comes to taxation. You can also choose to file as a corporation.
Dodge the Paperwork
When you run your business is a corporation, you also enjoy limited liability, but there are a number of other requirements – all of which involve paperwork. For example, corporations must pay fees annually to the state, create annual reports, and hold shareholder meetings. There are also substantial requirements for record keeping.
LLCs on the other hand, don’t have any of these extensive recordkeeping requirements, can avoid annual meetings, and depending on the state, often won’t need to file any annual reports.
Unlike a corporation, LLCs can distribute profits any way they like. For example, you and your business partner may both have an equal interest in your LLC, but you may have contributed more money while you were getting that business off the ground. In that case, you may receive a greater share of your business profits.
Corporations are limited here, and all profits must be distributed equally based on the types and number of shares that shareholders hold.
Setting up your LLC isn’t difficult, although different states charge different taxes and fees. Generally, the prices should be simple enough for you to handle on your own, older it’s always a good idea to talk to an accountant or lawyer.
The application process can be done online, you just need a full code a certificate of formation or the articles of organization. Then, you need to add your company name and address the contact details for the registered agent, and a description of your business.
What to Know About Setting Up and LLC
While it’s easy to set up an LLC, and there are many benefits, there are a few things you should also be aware of.
Unless you decide you’d like to be taxed as a corporation, you’ll be dealing with self – employment taxes. You’ll still need to pay for Social Security and Medicare, so it’s a good idea to talk to an accountant.
Forming an LLC with other people? Keep in mind that in many jurisdictions if one of those people leaves your LLC, that LLC will no longer exist.
When you’re self-employed, it’s always a good idea to keep your personal and business finances separate. This is particularly important when you operating as an LLC. Make sure you set up an independent bank account for any expenses and always keep meticulous records. Otherwise filing your taxes may become a nightmare.
The IRS can also audit you for up to five years, which is why it’s so important to keep track of your business expenses.
If you’re ready to get serious about your business the benefits of an LLC may mean it’s the best option for you. This is particularly true if you think there could ever be a chance that an unhappy client or customer decides to take you to court for negligence.
An LLC is also a great option if you’re hoping to reduce the amount you may owe in taxes in 2019 and beyond.
Looking for more information about business finance? Be sure to check out some of our interesting, helpful blog posts today.