Limited liability companies (LLCs) are hybrid legal structures that provide operational flexibility and tax efficiencies of a partnership and limited liability features of corporations. The business structure is usual in growing businesses and startups as it is easy to form and flexible. More importantly, the interest is limited, and they are not personally liable for the companies’ debts.
Below are reasons to choose LLC business structures.
LLCs can choose how they get taxed, a unique benefit of the business type. By default, they get taxed like sole proprietorships. In this case, the business income flows to the LLC and gets claimed on the owner’s returns, and no tax is to be paid at the corporate level. Also, an LLC can opt for corporation tax with the options for S-corporation or C-corporation tax. C corp taxes income at the corporate level first, then personally when paid as distributions.
However, S-corp taxation is similar to the pass-through method except that an LLC, owners considered employees for tax purposes. It means your burden for self-employment taxation can reduce by paying the tax on your salary allocation while keeping the other income in your business account. To help you learn more about the LLCs you can check out the llc vs partnership review and choose the best structure for your startup.
Options for Profit Allocation
Corporations dictate the amount to allocate the shareholders, strictly on the number of shares they own. As a business owner, you cannot control the money to distribute to the shareholders. However, in an LLC, the options are limitless since you can share the income as you wish. You could either base distributions on the capital contribution or the level of the company involvement. In this way, LLCs give owners some flexibility over how to operate the business.
Besides, it is simple to start and maintain the LLCs, so you can focus on expanding your business than going through administrative challenges of incorporation. You don’t need an attorney from an LLC, but when uncomfortable with the process, you can seek professional help.
Limited Personal Liability
If your business is a partnership or sole proprietorship, you become the same person with your business, and the business’s debts are your debts. Also, if your employee or business partner is negligent, your assets will be at risk. LLCs take responsibility for their obligations and debts, and although you might lose your capital, personal assets like banks account and home cannot settle business debts. Your assets are also safe when your business partner or employee is negligent.
Although corporations offer limited liability, they need to meet some requirements not suited for small businesses with informal management structures. For instance, corporations need to hold annual meetings of the shareholders, pay annual fees, and make annual reports. In contrast, LLCs won’t hold annual meetings or keep extensive records. Also, in many cases, they don’t file the annual reports.
When considering the legal structure for your business, you can read the llc vs partnership review to help you evaluate management liability, tax prospects, transferability, and profit allocation that can affect your business to help you choose.