Why Is an LLC the Best Business Structure? (5 Reasons)
A limited liability company is one of the best options when establishing an entity, especially when you are planning to start a small business.
Through the help of our business experts with over a decade of practice and after comprehensive research about the topic, we will help you understand why a limited liability company is the best business framework for you.
This ranges from touching into its advantages, both legally, and in terms of tax repayment.
Quick Summary
- A Limited Liability Company (LLC) is the best business framework because it offers property security to its owners.
- Limited liability companies can be either a partnership or sole proprietorships.
- Businesses with limited capital are the best recommended for using a limited liability company.
Why an LLC is the Best Business Structure
One of the reasons why limited liability companies are the best is that they give you options when it comes to setting up. A limited liability company can be a sole proprietorship or partnership where two owners exist.
If there is only one owner of an LLC, then it will be treated as a disregarded entity (a pass-through tax entity) for tax purposes.
If a limited liability company is taxed as a partnership, any income or loss generated will be passed through to the owners of the LLC and reported on their personal returns.
However, if the LLC is taxed as a C-corporation or S-corporation, then the income or loss will still be passed through to the owners, but it will also be taxed once again at the individual level.
LLCs are generally flexible. Unlike corporations, LLCs may allow for different ownership structures, such as allowing members to have unequal voting rights and unequal distribution of profits.
Additionally, in the case of an LLC taxed as a partnership, you may use different allocation methods to determine how income or loss is allocated.
What Types of Businesses Should Choose an LLC?
The types of businesses that should choose an LLC are small business owners, newly-formed entities, businesses with limited capital, and sole or multiple owners.
As mentioned, business structures are flexible. There are many ways to form an LLC, and it can be under any structure such as:
1. Small Businesses
If you have a small business and want to limit your own liability, then an LLC is one solution (although it won't eliminate all possible forms of liability). It will not prevent you from being sued for some form of wrongdoing. However, it will help protect your personal assets.
2. Businesses with Limited Capital
Businesses with limited capital may want to consider an LLC as a form of business organization since it is relatively easy to set up and less expensive than other forms of business such as corporations or S-corporations.
Moreover, if the LLC is taxed as a disregarded entity, then you won't need to file separate personal tax returns for the business.
3. Businesses with Many Owners
Businesses such as general partnerships and limited partnerships may want to consider an LLC since it allows for multiple owners. This may help protect partners with their own liability.
Limited liability companies are also popular among new businesses. You can keep your start-up costs low since there are fewer formalities to follow.
It is easier for a limited liability company to raise funds as compared to a corporation due to the flexible ownership structure and ease of the process, which gives it a distinct advantage over other forms of business organizations.
It's difficult to narrow down the types of businesses that can be LLCs. Because it is a flexible form of business, any type of company may use an LLC, including:
- Consulting firms
- Marketing and advertising agencies
- IT firms
- Landscapers
- Contractors and Builders
- Restaurants
- Fitness studios
Advantages of an LLC
A Limited Liability Company has some benefits that are similar to both corporations and partnerships.
Below are some of the benefits linked with limited liability companies:
1. Personal Asset Protection
Because it is considered a separate entity from the LLC owner, liability protection is one of the biggest advantages you will have when you form an LLC.
This means that the business itself is its own legal entity from the LLC members, so if you are sued, or something goes wrong with your company, only the assets of the company are at risk.
It does not mean you can conduct any type of activity without being held accountable - if you personally sign for a loan, accept the responsibility on behalf of the company, commit insurance fraud, or commit any other illegal activity such as not paying off your business debts, then you can be held legally accountable.
However, this does not mean that the asset protection is useless - creditors and injured parties cannot seize personal assets such as your house or car when they chase after money owed to them by your company's business debts [1].
2. Legal and Tax Advantages
Another advantage of running your business as a Limited Liability Company is that it can help you avoid double taxation.
Danya Shakfeh an attorney at Motiva Business Law, explains that the IRS recognizes LLCs as disregarded entities, eliminating double taxation concerns.
In other words, it is subject to pass-through taxation - the problem with traditional S-corporation or C-corporation and limited partnerships is that owners are taxed twice on earnings: first, at corporate tax rates and then again on personal income taxes.
With a limited liability company, you pay LLC taxes only once because the company itself does not pay income taxes, but you pay self-employment taxes.
However, you must remember that any money earned by the company is also subject to personal income tax once it is distributed as dividends, so this isn't a big advantage.
3. Operational Flexibility
Limited Liability Companies are very easy to set up and operate compared to other corporations or partnerships where there are complex requirements related to the number of shareholders, voting rights, etc.
People who are starting a business can do it on their own, which is much easier than working with other partners or investors to set up a formal corporation.
Furthermore, if you are worried about liability, keeping your business as an LLC means that you can always convert to a standard corporation after your business becomes well-established.
4. Flexible Management Structure
An LLC has another major benefit - it allows the owners (called members) to manage their business independently without having to work directly with other shareholders or partners.
The agreement between the LLC owners also does not have to be complex since an LLC operates as Sole Proprietorships, and you can structure it in any way that works best for you and your business.
5. Credibility
This is one of the main benefits of running your business as an LLC. A new corporation or partnership will have difficulty getting new customers because they are not yet established, but with an LLC, you don't have this problem.
Customers automatically recognize that an LLC is less risky since it is legally separate from its owners. Moreover, if your business grows widely, an LLC is more credible in the eyes of customers and suppliers.
Credibility increases for your company when you operate with limited liability since it is viewed as a separate business entity from its owners.
Based on his experience setting up BoxStar Movers, owner Duman Zhumagulov agrees and shares that the setup promotes professionalism and proper governance.
Customers are also less likely to sue companies that are structured as Limited Liability Companies because they cannot go after the personal assets of the LLC owners, which makes it more difficult for them to collect a judgment against your company.
To summarize, running your business as an LLC has many pros, including limited personal responsibility, simpler tax filing requirements, operational flexibility, and credibility among customers and suppliers.
However, there are also some cons to being an LLC.
Disadvantages of an LLC
Some of the disadvantages linked with limited liability companies include:
1. Higher Costs
Running your business framework like an LLC means higher fees and paperwork compared to working alone or with one partner.
LLCs incur expenses for certain legal and compliance obligations – such as formation filing fees, annual report fees, state franchise taxes, and expenses associated with maintaining good standing with the state. – Michael Callahan, Attorney and Founder of The Callahan Law Firm
You will be dealing with lawyers, accounting professionals, and other high-cost specialists much more frequently for their professional services in the beginning when you are setting up your LLC, so this is one of the disadvantages [2].
2. Neutrality
Although an LLC does not have the same level of tax benefits as a corporation, there are no major disadvantages in choosing this structure.
It is simply a matter of being neutral and whether you want to take advantage of the tax benefits of a corporation or the liability protection and operational flexibility that you get with an LLC.
3. Transferable Ownership
LLCs are not as transferable compared to other corporations. If you want to sell your LLC, it can be difficult to find a buyer.
This is because of the limited liability structure, which means that nobody will buy an LLC with just one owner since there is no legal separation between the business and the owner if they run into problems.
4. Investment Disadvantages
An LLC is not as attractive for investors as a corporation. This means that it will be difficult to attract outside investments for your company, and you might be limited to operating with only one owner as a sole proprietorship.
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FAQs
Why Is LLC So Important?
An LLC is so important because it protects your personal assets at stake. This is because of the limited liability that the LLC provides.
And it's not just for investors, entrepreneurs also need this so other companies won't sue their business if something goes wrong with their products or services, keeping them protected from any personal responsibility.
What Does an LLC Protect You From?
An LLC protects you from personal liability and double taxation. This means that liability falls on the business and its assets, not on you as an owner or on your personal property.
Why Choose an LLC?
You should choose an LLC because it offers limited liability protection, advantages in taxation, operational and organizational flexibility, and establishes credibility and legitimacy.
An LLC has become a popular choice among entrepreneurs or small business owners who intend to form small businesses easily without going through all the complicated steps and corporate paperwork required by other corporate structures.
Like any other business entity, an LLC has its advantages and disadvantages. It is better to consult experts when starting an LLC because the structure of your business entity will affect other aspects such as taxation and liability.
References:
- https://www.investopedia.com/articles/pf/08/asset-protection-business.asp
- https://www.forbes.com/advisor/business/what-is-an-llc/
