When you are ready to launch a new business, you have many decisions to make. One of the most important ones regards the structure of your start-up. In many cases, creating a formal business structure in the form of a limited liability company (LLC) offers significant advantages.
An LLC combines the benefits of a corporation, sole proprietorship, and partnership into one business entity, while offering its owners liability protection, tax advantages, and a flexible management structure.
Laws governing LLCs may vary from state to state. However, in general, an LLC protects its owners from personal responsibility for its liabilities or debts. This article will explore these and other reasons why an LLC may be the right business structure for your organization.
Read more: Legal Documents to Start a Business
Easy to Form and Maintain
As a small business owner, you have a lot on your plate. One of the main advantages of an LLC is that it is easy to set up and run.
To form an LLC, the only document you need to draw up are your Articles of Incorporation and an operating agreement. You will not need to hold annual shareholder meetings such as those required for a corporation. You also do not need to create a set of bylaws.
States vary in their requirements for annual or biennial reports for LLCs. This states do not require this form of paperwork:
- Alabama
- Arizona
- Arkansas
- Delaware
- Missouri
- New Mexico
- Ohio
- South Carolina
Check with your attorney or registered agent to make sure you are following your state’s legal guidelines.
Ownership Flexibility
Another advantage of LLCs over other business structures, such as corporations, is their ownership flexibility. You can choose whether your company is member-managed or manager-managed. In a member-managed LLC, the owners are involved in the day-to-day operations. A manager-managed LLC has a more hands-off approach.
Most states recognize a single owner LLC. As a single owner LLC, you can make your own business decisions without needing the approval of other partners as you would in a corporation. If you own your business with two or more partners, you can create an operating agreement that spells out your individual roles and obligations in a way that best suits the needs of your business.
Start Your Single-Member Agreement
Personal Liability Protection
Since an LLC is a legal entity separate from its owners (also called members), these individuals are not personally responsible for the LLC’s debts or other liabilities.
What this advantage means is that an LLC's legal obligations do not put its owners’ personal assets, such as their home or individual bank accounts, at risk. Keep in mind that, in certain instances, such as if you personally guarantee a business debt or your failure to follow due care harms a third party, you may still bear some legal responsibility.
Read More: Choosing Between LLC and Sole Proprietorship
Tax Benefits, Flexibility, and Deductions
Another distinct advantage of an LLC comes at tax time. The IRS considers an LLC as a "pass-through" entity. This designation means that LLCs miss the form of double taxation that standard corporations typically encounter.
A corporation's profits are taxed as income, and then its shareholders must pay taxes on earned dividends. However, the IRS allows an LLC’s allocated profits to be taxed only once on each LLC owner or member's individual income tax return.
LLC owners also may be able to deduct 20 percent of their business income with the 20 percent pass-through deduction established under the Tax Cuts and Jobs Act. Additionally, an LLC owner does not have to pay unemployment insurance tax on their own salary.
Member Management Flexibility
In addition to ownership flexibility, LLCs have a flexible management structure.
Corporations must have a board of directors to oversee company policies and officers who carry on the day-to-day business. Owners must meet each year to elect directors and conduct other business.
LLCs members and managers do not have to hold regular meetings, and they have more freedom to choose how they wish to do business. Also, there are no limits on the number of owners – minimums or maximums -- an LLC can have. An LLC can have one, five, 10, or even hundreds of members.
Flexible Profit Distribution
LLCs also have flexibility in the distribution of their profits to owners. There are no requirements to distribute according to ownership percentages or the number of owners. For example, the owners may draw up an operating agreement that states that one person is entitled to a greater share of profits because they invested more in the startup phase.
In contrast, when a company is incorporated, it must distribute profits according to the number and types of shares each shareholder has.
Less Paperwork
Establishing an LLC requires minimal paperwork. An LLC’s articles of incorporation typically include the LLC's name, location, members, the planned duration of the business, and any other state-mandated legal information. Many states have a fee for filing this paperwork.
However, LLCs typically do not have to file annual reports, create bylaws, and perform other administrative work that many other business structures must perform.
In conclusion, an LLC may be the right business structure for the entrepreneur or small business owner who wants to have limited liability protection, flexibility in ownership and management options, and savings at tax time.
In addition, by establishing an LLC, you convey a sense of credibility with your clients and customers. As an established LLC –as opposed to a sole proprietorship -- you can set up a business with a DBA name other than your own name that is registered with the state. The structure shows you are professional and committed to your business.
If you are interested in setting up an LLC or your business, it’s essential to have a legal and valid LLC operating agreement. Visit lawdistrict.com to find an easy-to-use template for this important document. For more information on how to start an LLC, visit lawdistrict.com.
When you are ready to launch a new business, you have many decisions to make. One of the most important ones regards the structure of your start-up. In many cases, creating a formal business structure in the form of a limited liability company (LLC) offers significant advantages.
An LLC combines the benefits of a corporation, sole proprietorship, and partnership into one business entity, while offering its owners liability protection, tax advantages, and a flexible management structure.
Laws governing LLCs may vary from state to state. However, in general, an LLC protects its owners from personal responsibility for its liabilities or debts. This article will explore these and other reasons why an LLC may be the right business structure for your organization.
Read more: Legal Documents to Start a Business
Easy to Form and Maintain
As a small business owner, you have a lot on your plate. One of the main advantages of an LLC is that it is easy to set up and run.
To form an LLC, the only document you need to draw up are your Articles of Incorporation and an operating agreement. You will not need to hold annual shareholder meetings such as those required for a corporation. You also do not need to create a set of bylaws.
States vary in their requirements for annual or biennial reports for LLCs. This states do not require this form of paperwork:
- Alabama
- Arizona
- Arkansas
- Delaware
- Missouri
- New Mexico
- Ohio
- South Carolina
Check with your attorney or registered agent to make sure you are following your state’s legal guidelines.
Ownership Flexibility
Another advantage of LLCs over other business structures, such as corporations, is their ownership flexibility. You can choose whether your company is member-managed or manager-managed. In a member-managed LLC, the owners are involved in the day-to-day operations. A manager-managed LLC has a more hands-off approach.
Most states recognize a single owner LLC. As a single owner LLC, you can make your own business decisions without needing the approval of other partners as you would in a corporation. If you own your business with two or more partners, you can create an operating agreement that spells out your individual roles and obligations in a way that best suits the needs of your business.
Start Your Single-Member Agreement
Personal Liability Protection
Since an LLC is a legal entity separate from its owners (also called members), these individuals are not personally responsible for the LLC’s debts or other liabilities.
What this advantage means is that an LLC's legal obligations do not put its owners’ personal assets, such as their home or individual bank accounts, at risk. Keep in mind that, in certain instances, such as if you personally guarantee a business debt or your failure to follow due care harms a third party, you may still bear some legal responsibility.
Read More: Choosing Between LLC and Sole Proprietorship
Tax Benefits, Flexibility, and Deductions
Another distinct advantage of an LLC comes at tax time. The IRS considers an LLC as a "pass-through" entity. This designation means that LLCs miss the form of double taxation that standard corporations typically encounter.
A corporation's profits are taxed as income, and then its shareholders must pay taxes on earned dividends. However, the IRS allows an LLC’s allocated profits to be taxed only once on each LLC owner or member's individual income tax return.
LLC owners also may be able to deduct 20 percent of their business income with the 20 percent pass-through deduction established under the Tax Cuts and Jobs Act. Additionally, an LLC owner does not have to pay unemployment insurance tax on their own salary.
Member Management Flexibility
In addition to ownership flexibility, LLCs have a flexible management structure.
Corporations must have a board of directors to oversee company policies and officers who carry on the day-to-day business. Owners must meet each year to elect directors and conduct other business.
LLCs members and managers do not have to hold regular meetings, and they have more freedom to choose how they wish to do business. Also, there are no limits on the number of owners – minimums or maximums -- an LLC can have. An LLC can have one, five, 10, or even hundreds of members.
Flexible Profit Distribution
LLCs also have flexibility in the distribution of their profits to owners. There are no requirements to distribute according to ownership percentages or the number of owners. For example, the owners may draw up an operating agreement that states that one person is entitled to a greater share of profits because they invested more in the startup phase.
In contrast, when a company is incorporated, it must distribute profits according to the number and types of shares each shareholder has.
Less Paperwork
Establishing an LLC requires minimal paperwork. An LLC’s articles of incorporation typically include the LLC's name, location, members, the planned duration of the business, and any other state-mandated legal information. Many states have a fee for filing this paperwork.
However, LLCs typically do not have to file annual reports, create bylaws, and perform other administrative work that many other business structures must perform.
In conclusion, an LLC may be the right business structure for the entrepreneur or small business owner who wants to have limited liability protection, flexibility in ownership and management options, and savings at tax time.
In addition, by establishing an LLC, you convey a sense of credibility with your clients and customers. As an established LLC –as opposed to a sole proprietorship -- you can set up a business with a DBA name other than your own name that is registered with the state. The structure shows you are professional and committed to your business.
If you are interested in setting up an LLC or your business, it’s essential to have a legal and valid LLC operating agreement. Visit lawdistrict.com to find an easy-to-use template for this important document. For more information on how to start an LLC, visit lawdistrict.com.
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