There is an assumed addition of prestige when a business adds the letters LLC to its name. However, this perception is only a fraction of what an LLC can do for you. If you are wondering how to start an LLC, you can find the information online. Here are some things you need to understand before filing for an LLC:
It protects Your Personal Assets
This corporate entity will help you to protect your personal assets. Partnerships and sole proprietorships are liable for lawsuits and debt filed against the business. However, when you form an LLC, your personal identity will be separate from your business, which means that a creditor cannot get his hands on your personal savings, cars, and property.
Moreover, you will have protection from the acts of your employees. The personal assets of an LLC member are shielded against numerous actions. An LLC is responsible for its own obligations and debts, which means that you can lose all the money that you invested in it but your personal bank account will remain intact.
If you opt for a corporation, you will also have limited liability but you have to observe some requirements that might not be ideal for your small informal business. For example, corporations hold yearly shareholder meetings, pay fees annually to the state, and make annual reports. Moreover, a corporation has many record keeping requirements, which means that you will be drowning in paperwork.
On the other hand, LLCs do not have annual meetings and do not require you to keep many records. In most states, LLCs do not even need to file yearly reports.
An S corporation has several restrictions when it comes to ownership. For example, an S corporation cannot have more than a hundred shareholders. Moreover, this business entity cannot have corporations or foreigners as shareholders. However, an LLC does not have any restrictions on the type and number of owners.
When it comes to taxation, LLCs get the best of both worlds. An LLC doesn’t have its own classification for federal tax but it can adopt the tax status of partnerships, C and S corporations, as well as sole proprietorships. However, the IRS classifies most LLCs as sole proprietorships or partnerships automatically depending on whether they have a single owner or more.
LLCs can take advantage of pass-through taxation, where they do not pay LLC or corporate taxes. Instead, the company’s income passes through your personal tax returns and you will pay income tax on profits.
Flexible Profit Distributions
An LLC has more flexibility when it comes to distributing profits to the owners. LLCs are not required to distribute the profits according to owner percentages or equally amongst the owners. For instance, two people can have the same interests in the LLC but the one who contributed more money could receive a larger portion of the profits. Unlike LLCs, corporations have to distribute the profits depending on the number of shares.
All corporations have a management structure that is fixed – it consists of officers who run daily business and a board of directors that supervises the company policies. On the other hand, LLCs do not require this formal structure. As an LLC owner, you will have more say about the way your business runs and can make important decisions.
An LLC is flexible and simple, making it an ideal business structure for most small businesses. Although corporations also offer limited liability to their owners, as an LLC owner, you can also take advantage of minimal recordkeeping, tax benefits, ownership flexibility, and management flexibility.