(Newswire.net — May 22, 2022) — Entrepreneurship is more than just big plans and ideas. While the business structure may seem like a dull concern, it has far-reaching consequences when it comes to how your company will operate. Therefore, selecting the right business structure is vital. Should you form a sole proprietorship, a standard corporation, or opt for a limited liability company (LLC) instead? Let us examine the benefits of LLCs and why many entrepreneurs choose this structure for their new businesses.
Administrative Flexibility
The taxation laws vary widely between states. As a rule, your LLC should be incorporated in the state where your business operates. However, under qualified legal advice, entrepreneurs may have the option of establishing their LLCs in more business-friendly states. For instance, starting an LLC in Louisiana will allow your company to enjoy pass-through taxation at the same rate as traditional sole proprietorships. Certain states may also have lower incorporation costs and more pro-business legal structures.
Compared to corporations, LLCs are not limited by the type and number of members. US citizens, non-US residents, corporations, trusts, and other legal entities are all eligible to become LLC members. In addition, LLCs are not bound to the formal management structure of corporations such as having to elect a board of directors and corporate officers. With fewer administrative restrictions, it is relatively easy to make changes to the operating agreement, add new members, or transfer equity between investors.
Liability Protection
Even if there are only one or two founders in a company, an LLC is often the more pragmatic choice. In a sole proprietorship or a partnership, the business and its owners are deemed to be the same legal entity. This means that all business assets and debts are inherently transferrable to the owners. On the other hand, an LLC separates the assets of the company from the owners. Hence, it protects the owners’ personal assets from any debts and liabilities that may incur from the business.
Entrepreneurs may not like to consider the possibility of business failure. However, with risk an inevitable element in any business enterprise, LLCs provide useful limited liability protection. In the event of the business being taken to court for bad debts, negligence, or any other reason, the owners of the company cannot be held personally responsible. If the company fails, the owners may lose their investment but their personal assets such as bank accounts and properties remain safe.
Favorable Taxation
In a corporation, the company and its owners are taxed separately by the IRS. This means that profits are taxed twice—once at the corporate level and again when the funds are dispersed to the shareholders. Double taxation can result in the unnecessary loss of thousands of dollars of valuable funds for the business and its investors. In contrast, the profits of an LLC can be passed directly to its sole proprietor or shareholders, where it is taxed a single time as personal income.
By default, the IRS will determine your tax format based on the number of members in your LLC. However, an LLC can choose to be taxed in other ways. For instance, an LLC can apply to be treated as an S corporation for tax purposes. Individual members in the S corporation pay taxes based on their share of the corporate income. LLC members who are employed by the company must receive a reasonable wage and the business should cover their payroll taxes. This is useful for new businesses with multiple classes of investors.
Ease of Incorporation
The registration process for an LLC is quick and simple and perfect for entrepreneurs who are eager to hit the ground running. Assuming the necessary paperwork is in order, owners can complete the entire process in a matter of hours without the assistance of an attorney. Once the LLC is registered, owners can obtain an employer ID number from the IRS and proceed to open bank accounts for the business. Owners or managers of the LLC can immediately enter into contracts on behalf of the company.
Attorney fees for incorporating a corporation with a complicated business structure can vary from $500 to $5,000. If you choose to register your LLC without an attorney, you will only need to pay the affordable filing fee. LLC filing fees are as low as $50 in certain states. Consult incorporation experts or the local Secretary of State to find out the exact fees and requirements for the state in which you plan to register your business.
Limited liability for owners and investors is undoubtedly the primary advantage of choosing an LLC. Furthermore, the availability of pass-through taxation allows company members to make the most of the business profits. LLC is ideal for startups and small businesses because they are flexible and easy to administrate. If you are unsure if an LLC is right for you, seek the advice of legal professionals to determine the best business structure for your goals