When you are self-employed, it may be difficult to determine how you need to register your business, especially if it's just a small business you run by yourself. The benefit of setting up an LLC is that it will establish certain legal protections for your business while allowing you to still run it as a small entity. There's a great deal of flexibility when it comes to setting up and LLC as well - from how it's managed to how profits are divided. Here are five ways that setting up an LLC can help your business.
The most obvious advantage of an LLC is that it offers protection when it comes to liability for your business. As a sole-proprietor, your business and personal assets are all at stake if someone were to sue you or try to collect on business debts. Under an LLC, however, you are listed as a member. All members of an LLC have ownership of the business. Because companies cannot pursue a member's assets - such as a checking or savings account, a house, or a vehicle - those are safe from creditors.
Business taxes are generally not paid by the business itself. Rather, the income or loss is passed down to each of the members and is then filed on their tax return. This can be helpful since the taxes are subject to personal income taxes instead of high corporation taxes like larger businesses.
LLCs offer a great deal of flexibility in many areas. It's easy to create LLC businesses and assign members. Not only that, but it's also very easy to remove members. Members don't have to be individuals; they can also be trusts, corporations, or other tax entities. Aside from that, the LLC itself can either be managed by its members, or they can appoint a different manager entirely.
Flexibility also extends to how an LLC can be taxed. Though most LLCs choose to be taxed either as a partnership or a sole-proprietorship to take advantage of the pass-through taxes, the LLC can also be taxed as a corporation if chosen to do so.
Sharing profits is another example of the flexible nature of an LLC. You can choose to distribute profits evenly, but it's not necessary. You can also distribute profits according to the percentage of ownership, or any other manner of choosing.
When it comes to an S-Corp or a C-Corp, there is a lot of paperwork involved and it can get quite complex. In general, LLCs aren't subject to the same state-imposed compliance regulations as other business entities. This requires a lot less paperwork and hassle. You'll need an Operating Agreement, but that's about the extent of the paperwork. LLCs are easier to keep in good standing and keep in compliance because they don't have as many regulations to meet.
In certain instances, you're likely to seem more credible if you have an LLC because it is generally recognized as a more formal business structure than a sole-proprietorship. For example, if you are applying for a business loan you are considered to be more credible if you have an LLC. This will help you to seem less risky to lenders and can give you a greater chance of being approved for business funds.
There are many ways operating under an LLC can help improve your business. Not only is it more cost-effective and has less paperwork to deal with, but it also protects your personal assets from being seized if your business was to default. Pass-through taxes relieve some of that tax burden when it comes to the end of the year, and you have the flexibility to set it up just about any way you want to. For a business that looks more credible and formal to outside institutions, an LLC is a perfect choice when it comes to requesting a business loan or line of credit.
Publish Date: December 17, 2019 2:32 PM |
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