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So, you’re ready to take your passions to the next step. There are a lot of options to consider when starting a small business, and let’s face it, they get pretty confusing at times. Committing to a corporation seems too big and too risky for your needs. And, sure, starting a sole proprietorship is the easiest and cheapest option, but is it really the best? That’s where starting an LLC becomes a viable option.
Why is an LLC better?
Limited liability companies are fairly new form of business entity, but well-known and practiced all around the world. This type of business allows the company to have the same limited liability as a corporation, while granting flexibility with operations. Essentially, an LLC is the perfect cocktail of a corporation and a partnership. Not only do LLC’s reap certain tax advantages, but they also tend to receive boosted credibility and management benefits. Additionally, before starting an LLC, you are going to want to get familiar with the cost, insurance, and taxes associated.
Here are 5 reasons why starting an LLC is the best option for your business venture:
1. Limit liability
One of the most attractive aspects of starting an LLC is the fact that it has limited liability. (After all, it’s not called a “limited liability company” for no reason.) Being part of an LLC means that your business is separate from your personal life or the lives of the other members and owners. In other words, if your business takes a financial downturn, banks and legal entities cannot put the owners’ personal assets at risk. Therefore, the members of an LLC are only liable to the extent of their investment in the business. Personal assets don’t come into play when it comes to settling business debt.
2. Chance to be the Boss
The choice to turn your passion into a career is entirely yours. It just makes sense to be the one in charge of your own idea, doesn’t it? Starting an LLC gives you the opportunity to make business decisions without the obligation of consulting with partners. Essentially, an LLC allows you to own, manage, and operate a business on your own terms. As such, carrying out your business plans the way you envisioned becomes entirely more possible.
Similarly, because LLC’s allow you the freedom of operating a business without the same liabilities as a sole proprietor, you’re able to adjust the roles of partners as you see fit. In other words, if you enter in an operating agreement with another person, you are able to decide on respective obligations and structure your business accordingly.
3. Tax Advantages of Establishing an LLC
Before starting an LLC, it is important to understand the corporate tax structure. Typically, LLC’s pay taxes at a lower rate than corporations because theirs are dependent on the total income of the owner rather than the business. LLC’s are privileged with flexibility regarding how they’re taxed. In other words, LLC’s can choose how they’re taxed when they file: as a disregarded entity, partnership, or a corporation. Single-member LLC’s are usually treated as disregarded entities, meaning the activities of the business should be reflected on the owner’s federal tax return. If owned by a corporation or partnership, the single-member LLC will appear on the owner’s federal tax return as a division of that corporation or partnership respectively.
In addition to lower taxes, LLC’s are also not subject to double taxation the same way corporations are. The IRS considers LLC’s “pass-through entities,” which means it is not treated separately from its investors. While typically profits of corporations and their investors are taxed, LLC’s avoid double taxation completely. Why? Because the initial profits of an LLC are not classified as income, automatically dismissing them from having to pay self-employment taxes.
4. An LLC is Easier to Manage than a Corporation
Creating and running an LLC gives you many of the same advantages as running a corporation, but without much of the hassle. Firstly, LLC’s have looser requirements for meeting compliance standards. As such, they do not demand the same business formalities as a corporation with regard to board approval and regular meetings. Because of how easily compliance standards are met, keeping LLC’s in good legal standing is fairly simple.
Naturally, with less formalities comes less paperwork. When starting your LLC, however, be sure to write an LLC Operating Agreement. Doing so allows you to create distinct rules that govern your business. Otherwise, the default rules of your state will automatically apply to and govern your company.
5. Builds and Strengthens Credibility
Creating an LLC, or moving from a sole proprietorship to an LLC, shows customers, employees, and partners that you have taken the initiative to officially commit to your business. A sole proprietorship establishes credibility less successfully because it doesn’t prove that the owner took the time or paid the expenses to form an LLC. Not only does it show your dedication to your clients and associates, but it also shows commitment that banks find valuable. Consequentially, forming an LLC increases your chances of obtaining a business loan. Because LLC’s are treated similarly to corporations, they are also able to offer ownership interest in the business in exchange for money—leverage you wouldn’t have as a sole proprietor.
How to Start an LLC Company
Establishing an LLC isn’t hard, but requirements vary state by state. In most cases, you’ll start by choosing your business name and ensuring the company name is available and doesn’t infringe on any existing trademarks. Other common steps include filing your LLC’s articles of organization and obtaining any necessary licenses and permits. Since establishing an LLC differs by state, check out this guide with all the LLC information you need for every state.
Starting a business doesn’t have to be confusing. Investing in a limited liability company could be the best option for you to turn your passion into a business. Not only will you have the flexibility to grow as you please, but your customers and vendors will find your business ventures respectable throughout your growth. Not to mention, you’ll never have to worry about losing your personal assets for the sake of the business. Things are starting to get a lot clearer, aren’t they? Assess your options and see whether an LLC is the right path for you and your goals!