Small business owners have several choices when they are deciding what type of legal entity is best for their particular business. One legal entity that is particularly popular among entrepreneurs is the limited liability corporation (LLC). The following is a brief overview of some of the advantages of forming an LLC.
Easy setup and maintenance--Establishing an LLC involves registering with the Secretary of State (SOS) and paying a small fee. Though you must file an articles of incorporation with the SOS, the total amount of paperwork you must file is much less extensive than a corporation. Furthermore, LLCs are not required to hold annual shareholder’s meetings or board elections, to draft specific bylaws, or to file annual reports. You also do not have to be a U.S. citizen to register an LLC, and the option is available to resident and non-resident aliens.
Added credibility–Even though many sole proprietorships and partnerships can be successful, simply adding “LLC” to your company name often adds credibility to your business and lets your customers know you are registered with the state.
Protecting your personal assets–Unlike a sole proprietorship or a partnership, an LLC is a separate legal entity from its owner. As such, your personal and business debts and assets are separate from your personal debts and assets. This means that you will not be held personally liable for debts of the business, except in rare circumstances. Therefore, your home, personal bank accounts, and other property will not be at risk. Learn more about protecting your assets in an LLC here.
Pass-through taxation–Unlike corporations, owners of LLCs are not subjected to double taxes. Instead, you can simply claim profits on your personal tax returns (called “pass-through” taxation) so that you are only taxed once.
Flexible profit-sharing–Partnerships generally must share profits equally and owners of a corporations generally earn profits based on their percentage of ownership interest or capital contribution. The owners of an LLC, however, have the flexibility to share profits (in most cases) as they choose and are not limited to contribution percentages. For example, if one owner contributes significantly more time to daily operations, he or she may be allocated more profits than an owner who simply contributed capital.
These are only some examples of the benefits of forming an LLC for your small business. If you have any questions regarding LLCs or choosing a business entity, consult with an experienced small business attorney today.