4 Reasons to Form an LLC
Before you can start your own business, you’ve got some important decisions to make – including what structure you choose for said business. Whether you’re in it on your own or have partners (silent or otherwise), you have several options for business structure. Here’s why an LLC may be the best business structure for you.
You've got some protection from liability
Many new business owners start out by setting up a sole proprietorship or partnership. In fact, if you simply hang out a shingle and start doing business, you’re automatically considered a sole proprietorship (if you are the only owner) or a partnership (if you have one or more partners). These are the two simplest business structures, but they can be risky.
If something goes wrong – your business gets sued or goes bankrupt, for example – sole proprietorships and partnerships do nothing to protect you. That means any losses that your business can’t absorb can get passed on to you personally. If your business shuts down while still carrying debts, your creditors can require you to pay those debts out of your personal funds, even to the point of seizing property you own.
If your business is an LLC, on the other hand, your protected from any debts or liabilities that the business incurs. Note this won’t protect you against liabilities that you yourself incur. For example, if you take out a loan in your name to fund the business, an LLC won’t protect you from repaying that loan out of your personal funds if the business can’t afford to.
You get to pick your business's tax status
LLCs have incredible flexibility with regards to taxes. By default, a single-member LLC (meaning an LLC with only one owner) is taxed as though it was a sole proprietorship. That means you’d report your business income and expenses on Schedule C on your personal tax return, rather than filing a separate return for the business. If your LLC has more than one owner, by default it will be taxed as though it was a partnership.
However, if you discover there is a tax advantage to adopting a different approach, you can elect to have your LLC taxed as though it was a C corporation or S corporation. For example, choosing the S-Corp tax form for your LLC can help you reduce your employment taxes because you wouldn’t have to pay Medicare and Social Security taxes on any distributions you take from the business.
In most cases, LLC owners are best off with the default tax form for the business because sole proprietorship/partnership returns are far simpler to prepare than S Corp or C Corp returns. Consult with a tax professional to see whether the alternative tax form would be the best choice for you.
Other companies may be more willing to do business with you
Setting up an LLC sends a message that you take your business seriously. That makes you look far more professional to potential clients and even vendors. What’s more, it can help protect your clients from potential IRS and state requirements that they treat you as an employee rather than a contractor or vendor.
Federal and state taxing agencies have long wrestled with the criteria for determining whether workers are employees or independent contractors. The situation has only gotten more complex as telecommuting has become more common and solopreneurs have proliferated.
If you do some work for a client and the IRS or the state decides that that company should really have considered you a temporary employee, then your client will be in for some serious issues. Many companies are well aware of this potential problem and are leery of working with sole proprietorships for this very reason. If you set up your business as an LLC, on the other hand, clients will be hiring the business rather than hiring you directly – which makes it clear you’re no employee of theirs.
You’ll have fewer formalities than a corporation
Setting up a corporation requires you to jump through a number of bureaucratic hoops. You’d have to set up a Board of Directors, issue stock, draft your articles of incorporation and corporate bylaws, and file a significant amount of paperwork.
Setting up an LLC is a walk in the park by comparison. You’ll still have some paperwork to file with your state, but you won’t have to worry about directors and bylaws. Maintaining your LLC is also simpler than maintaining a corporation, since you won’t have to take minutes at board meetings and the like – in fact, you’re not required to have board meetings at all. That gives you more time and energy to focus on actually running your business.
Taking the next steps to launch your own business
Before you start filling out paperwork to get your LLC off the ground, it’s wise to speak with an expert on business formation. Mistakes that you make in setting up your business can later come back to haunt you in a big way. By getting expert help and advice from the beginning, you can help ensure a smooth launch for your new business.