Starting a business requires you to make many decisions. Perhaps the most important decision is what type of business you want to form. Many start-ups form as a Limited Liability Company (LLC) because of the many benefits this type of business brings to the owners/ members of the company.
Although you could read about more than a dozen benefits of an LLC, let’s stick with the most influential benefits that should motivate you to form your new business as a Limited Liability Company.
Yes, running a business comes with a wide variety of risks. When you form an LLC, you eliminate one of the risks called personal liability. Forming an LLC means you create a business entity that is 100 percent separate from you, the owner, or the members that are a part of your Limited Liability Company. According to a business law principle, you and your business are considered legally the same “person.” Your personal assets never come into play when making business decisions.
Let’s face it: forming a business entity often includes a mind-boggling amount of paperwork. Corporations must follow a large number of legal requirements that are not part of an LLC’s legal obligations. From shareholder meanings to filing the correct disclosure documents, running a corporation can feel like running a department at the federal government level.
By forming an LLC, you avoid the red tape associated with holding annual meetings with shareholders and keeping comprehensive records of financial transactions.
Some types of corporations face ownership restrictions and operate with a fixed management structure that offers little, if any, flexibility when it comes to making important business decisions in a timely manner.
As the owner or a member of an LLC, you enjoy much more ownership and management flexibility. This is an especially important benefit of an LLC for entrepreneurs that want to operate with a streamlined chain of command.
In baseball, a tie at first base goes to the runner. In the world of business formations, breaking a tie between forming an LLC and any other type of business entity comes down to taxes.
LLCs enjoy several tax advantages over other types of business entities. The most significant tax advantage concerns the principle called pass-through earnings. Instead of the LLC getting taxed on earnings, the earnings ‘pass-through” to each member of the LLC. This means business earnings get taxed at a typically lower individual tax rate.
Being taxed as a pass-through entity means there will be no double taxation. Those with large retained earnings, however, may take advantage of the new low federal rates by choosing corporate taxation.