One of the most important decisions you have to make as an entrepreneur is what type of business structure you will form. It will determine how you are taxed, what legal obligations you are responsible for, and how much money you can gain or lose.
The LLC has become one of the most attractive ways to operate a business. Although many first-time entrepreneurs choose to operate as a sole proprietor by default, the LLC has the magical capabilities of shielding personal assets from loss. It gives you the extra protection you may need to sleep at night and know that your home, car, and other personal assets of value won’t be taken away if someone sues the business.
Before making a decision that could impact the longevity of your business, talk to your Certified Public Accountant (CPA). Your CPA can help you determine the best legal entity structure for you based on your business goals. There is no one-size business structure that will work for everyone so learning the pros and cons of each option may save you tons of time and money down the line.
Ready to get started? Here are some advantages of an LLC you should consider:
1. Limited Personal Liability
LLC stands for Limited Liability Company. It’s somewhat of a hybrid business structure that gives you the tax benefits of a partnership with the legal protection of a corporation. As an LLC, the business is a separate entity from the owners. The individuals may lose what they put into the LLC but the personal assets of the owners will be protected from lawsuits.
2. Avoid Double Taxation
Companies organized as a corporation are subject to double taxation: paying taxes at both the corporate and individual level. When you operate as an LLC, you can skip the agony of having to fill out a business tax return because it’s not needed. The LLC doesn’t pay federal income taxes and does not have to file a tax return with the IRS. So, you’ll be able to save on tax return preparation fees, too!
3. Pass-Through Entity
If you are the only member in your LLC, the IRS will treat your business as a single-member LLC and you will be taxed as a sole proprietor. All of your business income or losses of the LLC will be reported on Schedule C and submitted with your 1040 tax return. This “pass-through” entity feature allows profits and losses to skip the business and transfer over to the individuals.
4. No Formal Structure Required
C Corporations and S Corporations are required to form a board of directors, plan an annual meeting, and maintain meeting minutes to be legit. You don’t need a team of people and advisors to start an LLC. When you’re ready to get the ball rolling, the process just requires your signature and information on documents. Because there are not as many formalities when starting an LLC, the process to get started is simpler and faster.
5. More Ownership Options
Where do you see your business in the next 10 or 20 years? Do you want to add more individuals to your profit strategy? If you are organized as an S Corporation, you’ll enjoy the benefits of pass-through taxation but will have ownership restrictions that limit how many owners you have. S Corporations can’t have more than 100 shareholders and the shareholders must be domestic. LLCs have pass-through taxation benefits without limitations on how many owners can be a part of the business and what type of owners are included.
6. Seek Expert Advice
Don’t try to make all the decisions for your business on your own. Consult with your CPA to determine the best course of action for you. Ask your CPA questions about taxes, business growth initiatives, funding options, and paying salaries or wages. A CPA will be able to give you options based on your specific goals and help you start your business with foundational knowledge that can save you tons of time and money.
Charlene Rhinehart is an award-winning speaker, consultant, and coach who uses digital technologies to share inspiring stories with the world. She helps others live their best life as a Financial Coach at Wealthy Women Daily, Founder of the Career Goddess Academy, and Travel & Lifestyle Writer at BlackCoupleTravels.com. Charlene recently published her first book, “Dividends Are a Queen’s Best Friend” on Amazon.
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