6 Financial Reasons Your Business Should Be a LLC
If you are thinking about creating a business, you may be thinking about what the right entity type is. If you haven’t thought about forming a limited liability company yet, you should be. It is one of the best entity types for small and even large businesses. The following six financial benefits should help explain why the LLC structure is so valuable.
The name says it all. When you have an LLC, your financial liabilities are limited to your investment in the business. If the business gets into financial trouble, your personal assets won’t be on the line.
Most separate business entities share this advantage. For example, corporations also have limited liability. However, sole proprietorships and partnerships are not protected in this way. For this reason alone, most small businesses should think about learning how to create an LLC.
An LLC can be taxed in a few different ways. You can select the way you want to be taxed. Your business can be treated as a sole proprietorship, partnership, an S corporation or C corporation.
Many LLC owners choose either a sole proprietorship or partnership depending on whether there is one or multiple owners. This makes the business a pass-through entity. In other words, the business itself does not pay taxes. Instead, the owners pay taxes based on their shares of the profits.
Flexible Profit Distribution
When you want to divide up the profits from a corporation, the only way to do it is based on the number and classes of shares. No single owner can receive a special distribution of profits. This exists to protect the shareholders.
However, with an LLC, you can distribute profits however you like. In many cases, this is a preferable arrangement. It lets your ownership team decide what makes the most sense at any given time. Perhaps one owner has done extra work and you want to reward him or her with an extra share of the profits. That is entirely up to the board of managers and the operating agreement.
With an LLC, you can change owners easily. The way that ownership is structured is entirely up to you and what you set forth in your operating agreement. Some other entity types, such as S-corporations, have restrictions on how many owners they can have.
Additionally, the way the ownership is structured in a C-corporation is more heavily defined by law. Using an LLC lets you be very flexible about how you approach this issue and you can change it in the future through a simple vote by the LLC members.
Cheap To Establish
Compared to many other entity types, an LLC is very inexpensive and easy to establish. There are just some registration fees with the state, and you will need to hire a service or lawyer to help. While you can file the forms yourself, this is usually not a good idea. Having an expert handle the process for you is preferable.
Beyond that, you will simply need some help with an operating agreement. Compared to the formation process of a C-corporation, this is significantly simpler and less expensive.
Perfect for Asset Holding
If you want to hold some assets under a special entity, an LLC is perfect. For example, you may have real estate that you want to manage easily as its own entity. An LLC is a great way to keep it separate from your personal assets while still allowing great control.
An LLC is also great for holding multiple assets in a portfolio. If you want to sell that portfolio, you only need to sell the LLC. This entity type can be a great way to simplify your ownership needs.
These benefits of an LLC makes it one of the best entity types for many businesses. Discover more and consider creating your own LLC to help organize and manage your business.