The Benefits of Forming an LLC for Your Business
There are several different models for starting a business. Many people begin their entrepreneurial career as a sole proprietor. This has its benefits, but also a number of downsides. In this article, we are going to discuss why an LLC is a preferred choice for many business owners.
What is an LLC?
A Limited Liability Company or LLC is a way of structuring your company. It combines different elements of a corporation and a sole proprietorship, arguably giving business owners the best of both worlds.
One of the main advantages of forming an LLC is that it limits the business owners’ (also known as members) liability. Therefore, if the business runs up significant debts, perhaps because it is hit with a lawsuit from an aggrieved customer, the business owners cannot have their personal assets seized to pay the debt. If you have a family home, this is an important point to make.
LLCs offer important tax benefits to their members. The owner of an LLC can extract profits in the same way as they would if they were operating as a sole proprietor. They pay tax as per their tax bracket and any business losses can be used to offset their tax bill. If there is more than one member of an LLC, distributable profits can be taxed as per a partnership, or not extracted and used to grow the business.
You can also file your taxes as a corporation, which has other advantages. If you are thinking of forming an LLC, speak to a tax accountant for more information on how an LLC can be advantageous tax-wise. Be aware that the IRS may choose to class your LLC as a corporation, even if the Operating Agreement states otherwise.
There isn’t a lot of paperwork involved in setting up an LLC. You do need an Operating Agreement, which sets out how your LLC is treated for tax purposes, but there is not as much paperwork as a corporation. Remaining compliant is also less onerous.
Privacy is a concern for some individuals. It’s possible to form an LLC and retain your anonymity in some states. If you form a New Mexico LLC, for example, you are guaranteed anonymity. All you need to do is hire a registered LLC agent. They can file your Articles of Association, create an Operating Agreement, and scan and forward your mail. You don’t have to visit New Mexico – it can all be done online or over the telephone. You use the agent’s address as your business address and only their information appears on formation paperwork, so your personal information remains private at all times.
Whilst LLCs offer a lot of advantages, there are some disadvantages too, and in some jurisdictions, when one member of the LLC decides to leave, the LLC no longer exists if the Operating Agreement does not expressly allow for this event.
Always talk to an experienced lawyer and accountant before forming an LLC.