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What are the benefits of forming an LLC

LLC benefits

A limited liability company, or LLC, is a popular choice of structure for many small businesses.  It provides legal separation between the business and its owners but is more flexible when it comes to administration and tax than a corporation.  Ultimately, the right structure for your business will depend on the nature of the business and your plans for its future.

LLC benefits

It’s worth consulting a suitably qualified lawyer or accountant to avoid making a mistake you will regret down the line.  Prepare for that conversation by giving the following benefits of an LLC some thought ahead of time.

Personal Liability

Trading as a sole proprietor or partnership puts your personal assets at risk in the event of your business being unable to cover its debts.  This is because the owners and the business are viewed as the same people.

With an LLC or a corporation, the business is regarded as a legally separate entity from its owners, who cannot be held liable for the debts or liabilities of the business (under most circumstances).  Keep in mind that, for credit purposes, lenders may require the owners’ personal assets as security for loans.

Taxation

Corporations are disadvantaged tax-wise when it comes to the distribution of profits because they are effectively double-taxed.  Once in the hands of the company at the corporate tax rate, and again in the hands of the owners when they receive dividends.  There is no LLC classification with the IRS, however.  LLCs are taxed, by default, as sole proprietors or partnerships, depending on the number of owners.  This is known as “pass-through” taxation, and it means the profits of the business are taxed only once, on the personal returns of the owners.

Additionally, LLCs can apply for S Corp tax classification if they meet specific ownership requirements.  With S Corp status, they can potentially reduce self-employment taxes like Medicare and Social Security by taking salaries from the business and receiving the balance of profits as dividends (which are not subject to either self-employment taxes or corporate tax).

Ownership

LLCs can take advantage of pass-through taxation for an unlimited number of owners of any profile.  S Corps status benefits are not available to LLCs who have more than 100 owners, or where owners include other entities or non-resident aliens.

Profit distribution

LLCs are permitted to distribute profits to owners on whatever basis they see fit.  Corporations (including S Corps) are required to distribute profits to owners based on their relative shareholding.

Administration

Corporations are required to adopt bylaws, run annual shareholders’ meetings, keep minutes of company decisions, and generally complete tedious amounts of paperwork, which can be overwhelming for a small business.  LLCs are encouraged to do these things, but it is not compulsory.

Management

Corporations are required to appoint a board of directors voted in annually by shareholders, and company officers are required for the day-to-day running of the business.  In contrast, LLCs can adopt corporate structures if they wish, but they are permitted to manage the business the way suits them.

An LLC is a cost-effective and practical choice of structure for a small business.  It allows a business to grow while having “the best of both worlds” by taking advantage of corporate-style liability protection and small company flexibility.

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