There’s no doubting the popularity of the limited liability company (LLC) for American businesses. There are thousands of new LLCs formed every day across the country, as entrepreneurs in many industries look to take advantage of the LLC’s benefits.
However, the LLC isn’t going to be the perfect business structure for everyone. In order to help you figure out whether the LLC is a good fit for your business, let’s walk through the seven best reasons to form an LLC for your startup.
1. Personal Asset Protection
The top reason to form an LLC or corporation is to protect your personal assets. The LLC has what’s known as the corporate veil, which is a layer of protection that prevents your business creditors from pursuing your personal assets, like your house, car, personal bank accounts, etc.
If you operate your business as a sole proprietorship or general partnership, a lawsuit against your business is also a lawsuit against you as a person: there is nothing securing your personal assets from being seized to pay your business debts. However, if you form an LLC and maintain it properly, the corporate veil limits your creditors to pursue only your business assets.
2. Options for Taxation
LLCs actually get to choose how they want to be taxed, which is a unique benefit of this business type.
The default option is to be taxed like a sole proprietorship (if you own a single-member LLC) or a general partnership (if you own a multi-member LLC). With this form of taxation, your business income flows through the LLC itself and is claimed on the owners’ personal returns — there is no tax paid on the corporate level.
An LLC can also elect to be taxed like a corporation, with options for C corporation or S corporation taxation. C corp taxation taxes your income first on the corporate level, then again on the personal level when paid out as distributions.
As for S corp taxation, it’s similar to the default pass-through method, except for the fact that the LLC’s owners are treated as employees for tax purposes. This means that you can decrease your self-employment tax burden (a 15.3% tax rate that includes both Social Security and Medicare taxes) by only paying this tax on the salary you pay yourself while keeping the rest of your income in your business accounts.
3. Flexible Business Structure
Compared to corporations, LLCs provide their owners with a tremendous amount of flexibility regarding how they want the business to function and how it is funded. Corporations need to adhere to quite a few formalities, like having a board of directors, appointing officers, and holding meetings with shareholders.
On the other hand, an LLC allows you to change your managerial structure, amend your formation documents, change ownership roles, and more. You can make these changes at any time, as long as you inform the state of your new structure.
(Note: I recommend checking out the LLC vs Corporation guide from SmallBizDaily.)
4. Simple Formation and Maintenance Requirements
Forming an LLC takes more time and effort than starting a sole proprietorship or general partnership because these business structures form automatically the moment you start transacting business.
However, the LLC is much easier to form than a corporation is, because in most states the LLC requires significantly less information.
In addition, LLCs in most states have relatively simple maintenance requirements compared to corporations. Typically, all you need to do is file your annual report in a timely fashion, although some states don’t even have this requirement.
5. Credibility and Legitimacy
Sole proprietorships and general partnerships can often struggle for credibility in the eyes of consumers. This is due in part to the fact that these informal business entities don’t have assumed business names.
Instead, sole proprietorships and general partnerships typically operate under their owners’ personal names, which lacks professionalism.
Registering your business as an LLC gives you the opportunity to choose a business name that you will have the exclusive rights to. In addition, your business name will have either the initials “LLC” or the phrase “limited liability company,” which indicates to consumers that you’re serious about your business venture.
6. Options for Allocating Profits
Corporations dictate how money should be distributed to the company’s shareholders, based strictly on how many shares of the company each individual owns. You as the business owner have no control over how much money to distribute to each shareholder in a corporation.
With an LLC, your options are limitless — you can split up your business income however you’d like. You can base your distributions on how much money each owner contributed to the business, or you can split them up depending on each owner’s level of involvement with the company, etc.
This is yet another way that LLCs give their ownership groups a level of flexibility over how their businesses operate.
7. Expand Ownership Group to Raise Money
LLCs cannot issue stock like corporations can, so they are less inviting business structures for most investors, especially venture capitalists. However, an LLC can bring in new owners as a means of generating more investments for the business.
Of course, adding an additional owner to your LLC means giving that new owner some level of control over your operations, which isn’t always an ideal circumstance. Still, I figured I would mention this aspect because so many people think that it’s impossible for LLCs to attract investments. While it’s certainly harder than it is for corporations, it’s also far from impossible.
Should You Form an LLC for Your Business?
Obviously, there is no cut and dried, “one size fits all” answer for this question.
However, I do think that the LLC is a widely advisable business entity for many different kinds of businesses, and I would only recommend the corporation over the LLC if you want to sell stock or if you plan to expand your business into multiple states or countries.
This is due to the fact that, as I’ve already mentioned, the LLC cannot issue stock. Additionally, the LLC is not recognized as a business entity in other countries (and it has different rules from state to state, even within the United States), whereas the corporation is a standard business type around the world.
If you would like to get some assistance with the LLC formation process, take a look at our LLC service reviews. There are plenty of great companies that can form your LLC at a reasonable rate, freeing you up to spend more time on the actual operations of your business.
Frustrated by all the options and aggressive online sales tactics, Aaron Franklin created BestLLCServices.com to cut the clutter and bring clarity to entrepreneurs starting an LLC. Their focus is on reviewing and comparing the top LLC formation services while also crafting free resources that help you start a business. They sincerely believe finding the right service and free information should be a simple process so you can get started with minimal friction.