When it comes to protecting yourself and your business, incorporating is the way to go. Unfortunately, with so many different types of business incorporations, inexperienced entrepreneurs are often unsure of how to proceed.
What is an LLC?
As you’ve discovered, you have options. There are several different legal entities available to business owners, including:
- Sole proprietorship. The majority of entrepreneurial pursuits in the United States would be classified as sole proprietorships. In fact, if you don’t formally incorporate a business endeavor, it automatically operates in this fashion. Under a sole proprietorship, the business owner is personally liable for everything the business does and must report profit and loss on their personal tax return.
- If there are two or more business owners, a partnership splits responsibility between each party. However, all individual parties are still personally responsible for any lawsuits that are brought against the business. Profits and losses are also filed on personal tax returns.
- Under the corporation heading, there are C Corporations and S Corporations – each with caveats and rules. Generally designed for larger businesses, these structures separate legal and tax elements from the business owners.
But then there’s something known as a Limited Liability Company, or LLC. It strategically combines elements of a sole proprietorship, partnership, and corporation – making it highly attractive and extremely versatile.
An LLC is an independent legal structure that’s separate from the business owner. However, it’s taxed similar to a sole proprietorship (if one owner) or partnership (if multiple owners). Read more on how to form an LLC in a couple of steps.
The Top Benefits of an LLC
With so many different types of entities and legal structures, what is it about the LLC that entrepreneurs and business owners find so attractive? Some of the benefits include:
- Quick to incorporate. An LLC takes no time to set up. With quick incorporation, you can start and finish the process in a matter of days. All you need is some basic information, a couple of forms, and you’ll be on your way.
- Simple requirements. There are relatively few requirements needed to qualify for an LLC – though each state is slightly different. Texas, for example, gives LLC owners many of the same advantages and protections of a corporation, but with simpler rules and regulations.
- Less personal risk. Perhaps the biggest benefit of an LLC is the insulation from risk. The limited liability nature of an LLC means the owners aren’t personally responsible for the LLC’s debts or lawsuits. If the LLC files for bankruptcy, the members don’t have to use personal money to pay off the debt. If someone sues the LLC, the owners don’t risk losing their home to cover a settlement. So long as you don’t pierce the corporate veil, there’s enough protection to keep you safe.
There’s a reason LLCs are among the most common legal entities in the United States. They’re simple, cost-effective, and provide an extra layer of legal protection. If you’re launching a business, an LLC is worth considering.
When an LLC Isn’t Right
Admittedly, an LLC isn’t ideal for every scenario. Depending on your situation, there can be some disadvantages when it comes to taxes. In most cases, LLCs are subject to self-employment taxes. This means taxes are passed on to the owners who must file profits and losses on their personal federal tax returns.
As you probably know, self-employment taxes are typically higher than they would be at the corporate level. You’ll have to pay 100 percent of your Medicare and Social Security (as opposed to having the business pay for half). So it’s for this reason that you’ll need to run a cost analysis and figure out how much higher your taxes will be.
If you find that an LLC doesn’t provide the options you need to properly manage taxes, legal protection, and separation of assets, you’d do well to explore other options – including some of the ones discussed in this article.
These days, business entities can be established pretty easily online. But if you’re unsure of how to proceed and can’t figure out which options are best for your needs, feel free to speak with a business attorney. Peace of mind is a beautiful thing.