So you want to start your own company and the first step you need to take is deciding which type of business entity you would like it to be. One of the most powerful entities is the LLC, which has many benefits and advantages. Read on to see if setting up an LLC would be the right decision for your business.
Setting up an LLC can protect your personal assets, reduce your taxes and save you some time. The LLC structure is relatively new and combines aspects of the corporation entity with that of a sole proprietorship or partnership, its primary advantage being that it affords its members the personal liability protection of a corporation without all of the formalities of running one.
Additionally, LLCs also have the flexibility to be taxed as a corporation or “pass-through entity,” similar to a sole proprietorship or general partnership.
Many people consider the liability and asset protection to be one of the LLC’s greatest benefits, as it is viewed as a legally distinct entity from its owners/members. In order to understand the benefits of this, consider that as a sole proprietor, you and your business are legally inseparable. This means that your company’s debts are your own and your property and assets could all be taken from you if your business is involved in a lawsuit or bankruptcy. A general partnership presents even greater risks in this regard since both partners are on the hook for the business, even if it was one partner’s bad decision that led to the damages.
By contrast, if your LLC business hits hard times, you are not personally responsible. There are limits to this protection, however; you and other LLC members could be liable for the debts of an LLC if:
– You personally guarantee a debt
– You intermingle your personal funds with LLC funds
– Your LLC has minimal capitalization and minimal insurance
– Your LLC fails to pay state taxes or otherwise violates state law
LLCs are also the most flexible business entity when it comes to taxes since it is by default recognized as a “pass-through” tax entity by the IRS. This means that it “passes” income, deductions, losses, gains and taxes credits directly through to you and thus you will pay taxes at your individual rate. Additionally, if you actively participate in running your LLC, you are allowed to deduct operating losses against your regular income.
Another advantage of running an LLC is that ownership interests may generally be sold to third parties without disrupting operation, unlike in a proprietorship or general partnership. For example, if you one day plan on passing the family business down to another family member, this would be easier done by converting your proprietorship to an LLC. Legally speaking, a proprietorship is legally bound to you in such a way that if you die, the business dies as well, and others will have a very difficult time inheriting your life’s work.
Other benefits of an LLC include that it has no ownership restrictions, it provides living trust flexibility, it makes it easier to raise capital (through selling membership interests or creating new classes of membership interests), and it also offers greater credibility when dealing with other companies as well as banks and potential partners.
