Limited liability companies (LLCs) offer a wide variety of benefits for business owners. They provide a lot of the benefits of having a corporation, without all of the paperwork and red tape that is required to legally maintain a corporation. As you head into the new year, it might be time to consider whether creating an LLC is a good idea for your business.
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Why are LLCs so popular?
Although the traditional C-Corporation is likely the first type of business that comes to mind when considering business entities, it is actually far less popular than you might think. By some estimates, there are roughly 21.6 million LLCs in the United States. In comparison, there are approximately 1.7 million traditional C-Corporations. There are another roughly 23 million sole proprietorships as well.
LLCs are popular because they are not only very easy to form, but they are also easy to run. They make taxes much more streamlined, and they have limited liability for owners too.
What are the benefits of choosing an LLC as a business entity?
An LLC gives you the benefits of a corporation without all of the hassles. Some of the most important benefits are outlined below.
Limited personal liability
An LLC is a separate legal entity. It can hold real estate, create contracts, get sued, and take on debt, just like you can as an individual. It can also be legally liable for certain obligations and commitments.
Like a corporation, an LLC insulates the owners of the company from business liabilities. If the company cannot pay a debt or it gets sued, the owners’ personal assets are not at risk. Instead, liability is limited to whatever assets the company may have.
To take full advantage of limited liability, be sure that you keep the LLC’s books, records, and bank accounts separate from your private accounts. Ensuring that your company acts like a company will help address any challenges to extending liability for the LLC.
Although an LLC is a separate legal entity, it is not a separate entity for tax purposes. There is no separate tax classification for an LLC. Instead, it adopts the tax status of whichever entity it would like—including a sole proprietorship, partnership, S-Corp, or C-Corp. This flexibility allows the company owners to decide which tax status will be the most advantageous for their situation.
An LLC does not have to meet the specific requirements regarding filing that a corporation must use under state law. Holding meetings, creating annual reports, and paying annual fees are all pretty common for a corporation. But an LLC can often avoid these time-consuming requirements. Forming an LLC is often a much easier process as well.
Ownership and management flexibility
An S-Corporation has the benefit of pass-through taxation, but it cannot have more than 100 shareholders, and they cannot have foreign shareholders or shareholders that are corporations. LLCs do not have those same restrictions—and they can use pass-through taxation if they want to do that.
Corporations must have a certain type of ownership structure. Specifically, they must have a board of directors, along with shareholders who meet to review the company’s business. An LLC does not have to have a board of directors. The LLC members can create a management structure that works for however they want to run the company.
What are the challenges and disadvantages of an LLC?
Even though there are quite a few benefits to an LLC, there are some drawbacks as well. Many of these drawbacks are state-specific. For example, in some states, if you have a single-member LLC, you may not get the same type of liability protection that you would have if you had more than one member. Other states, like California, will actually charge you more in fees to form an LLC compared to forming another type of entity.
Income splitting taxation
You might also find some issues with income splitting. Some or all of your income from an LLC may be subject to self-employment or payroll taxes.
Although restricting membership transfer can sometimes be a benefit, it can also be a challenge to attract new owners or investors. Transferring membership interests in an LLC is more challenging than just buying and selling stocks in a corporation.
Is an LLC really necessary?
It depends. Some businesses really do not need to create a separate legal entity.
However, limiting liability and asset protection is a huge advantage that every business owner should consider. If you are creating a single-member LLC, be sure that your state recognizes these as limiting liability. If they do not, one of the main advantages that you were seeking may not be available.If you are going to create a business entity, LLCs have a lot of advantages over other similar types of businesses. If you are unsure about whether creating an LLC is a good option for you, ask a Rocket Lawyer On Call® attorney to get tailored advice unique to your situation. If you’re ready to incorporate your business as an LLC, S-Corp, C-Corp, or Non-Profit, let Rocket Lawyer Incorporation Services do the heavy lifting for you to make the incorporation process fast, easy, and affordable.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.