When you start a business, you’ll need to make important decisions about how to structure it. Do you want to keep your business as a sole proprietorship or partnership? Or should the company be an LLC instead?
An LLC is beneficial in many situations, and it offers some advantages over partnerships and sole proprietorships. It can help attract investors in the future, protect your personal assets from liability, and provide tax benefits. But which type of entity is right for your business?
We’ll look at why you should form an LLC and 8 reasons why that’s the best choice for your business.
Protection From Liability
One of the most important reasons to choose an LLC is protection from liability. When people invest in a company, they want to be sure that they won’t be held personally responsible for the company’s debts or liabilities.
The owners of a corporation are personally liable for the company’s obligations. If your company has a lot of debt and goes out of business, the creditors can pursue the owners for that debt.
But when you form an LLC, the owners of the company are not personally liable for the company’s debts or obligations. This protection is important when you’re just starting because you don’t know what might happen with your business in the future. Creditors might bring a lawsuit against your company, but they won’t be able to pursue you personally.
Another important reason to choose an LLC is the tax advantages it offers. If you form a regular corporation, you will have to pay taxes on your company’s income as it is earned.
The profits will be taxed at the corporate level, and then again at the owner level when they are distributed as dividends. You can lower your tax bill by taking out a salary, but then your profits will be taxed twice.
Your LLC can choose to be taxed as a pass-through entity. When you form an LLC as a pass-through entity, it is not taxed at the corporate level. Your company’s profits and losses are passed through to the owners and are taxed at the owners’ individual tax rates.
This can lower the amount of taxes you owe, and it can make it easier to plan for your future tax bills.
The Cost Of Forming An LLC Is Relatively Low
The cost of forming an LLC varies from state to state. But even though it isn’t cheap, it’s a lot less than the cost of forming a corporation.
The total cost of forming an LLC varies from state to state, but it’s usually between $400 and $800. That’s not a ton of money to protect your assets and keep yourself out of court. Some adverts flood the internet promising free LLC registration. This is false, you must surely spend money to form an LLC.
LLCs Don’t Require Annual Meetings And Corporate Formalities
Most businesses must meet certain standards of corporate governance, keeping minutes at meetings, keeping an accurate record of members, holding and attending regular meetings, etc.
LLCs don’t have those requirements. There are no state-imposed standards for running an LLC, no required governance structure, no mandatory record-keeping, and no need to hold regular meetings.
Handy Governance Mechanisms
Another reason to choose an LLC is the governance mechanisms it offers. When you form a corporation, the articles of incorporation determine the rules and regulations of the company. A majority of shareholders must approve any changes to these rules and regulations.
In a partnership, the terms of the partnership agreement can affect the governance of the company. These rules are not set in stone, but they have to be agreed upon by all of the partners.
When you form an LLC, the operating agreement dictates the rules and regulations of the company. No more than a majority of the members can vote to change the operating agreement.
An LLC is also easier to dissolve than a corporation. You can dissolve the company at any time with the approval of the members. If you dissolve a corporation, you must follow a complex process.
Flexibility To React To Change
Another reason to choose an LLC is the flexibility it offers. This is one of the biggest reasons why a lot of entrepreneurs prefer an LLC to a corporation.
Most corporations have to follow a long and complex process to change important rules and regulations in the organization. An LLC can change its rules and regulations whenever the members want to.
For example, if you form an LLC as a pass-through entity and then want to change the tax status, you can do that at any time.
An LLC can also be changed in other ways that are important to the members. An example is the percentage of profit that is distributed among the members. In a corporation, you can’t change these things once the company is formed.
Confidence In Making An Informed Decision
Another reason to choose an LLC is the confidence it can give you. If you form an LLC, you can be confident that your company will be well-managed.
A corporation can be managed in two ways: the board of directors or the shareholders. A board of directors has specific rules and regulations that cannot be changed. The shareholders can change the rules of the corporation at any time; they are the owners of the company.
You have to be confident that the managers of your corporation are making good decisions. If you form an LLC, the members are responsible for making the decisions that are important to the company. You can be confident that they will make the right decisions because they have to follow the rules you have set out in the operating agreement.
LLC Members Are Not Personally Liable For Business Obligations
Members of corporations are generally liable for the company’s debts. In most states, however, LLC members are not liable for the debts of the LLC.
For example, let’s say that you own landscaping business as an LLC. A customer sues your business for failure to pay for work done. The customer has no claim on your personal assets.
He’s allowed to collect only from the assets of your LLC. You may have to pay for the judgment out of your own pocket, but you won’t have to worry about being dragged into court and having assets (like your house) seized to satisfy the judgment.
Choosing to form an LLC is important because it can provide protection from liability, tax advantages, handy governance mechanisms, flexibility to react to change, and confidence in making an informed decision.
These are just some of the reasons why you should form an LLC. When you form an LLC, you’ll make sure that your business is well-organized and managed. You’ll also make sure that your personal assets are protected from the liabilities of your company.