Whether you company is a new start up or has been functioning as a sole proprietorship or general partnership, you should thoughtfully consider incorporating your company as an LLC or Limited Liability Company. A lot of business owners presume that it is too expensive or consumes a lot of time, but both premises are false.
The benefits associated with creating an LLC naturally supersedes any assumed disadvantages. The aim of this article is to outline in detail some of the benefits of LLC incorporation. Protection of personal assets is the major advantage that LLCs provides. LLCs offers limited liability protection to their owners, which makes them NOT personally accountable for the financial obligations and liabilities of the company. Private assets such as savings account, shares of stock and houses of the proprietors cannot be pursued and attacked by creditors to pay for business obligations. However, in the case of a sole proprietorship or general partnership, the business and the proprietors are legally conceived as the same legal entity, which makes personal assets exposed and vulnerable.
LLC companies don’t usually pay taxes at the business level. All company earnings and losses are “passed-through” to proprietors and reported on their own personal tax returns. All taxes due are paid at the individual level. This is in contrast to all other types of incorporation where double taxation occurs; firstly when the earnings of the company are taxed, and secondly when owners and shareholders receive their profit.
Aside from taxation and protection, the presences of the LLC after your company’s name boosts your credibility and integrity with potential clients, suppliers, employees and partners just on the basis that your company is a legal entity.
LLCs also retains limited requirements for compliance, in contrast to S-incorporated companies and C-incorporated companies.
Any business structure in which all decisions are made by the owners can be established by LLCs. An LLC company can be handled and operated by managers or by the owners, this is in contrast with companies that have board of company directors who governs the main business choices of the organization and the managers controls the day to day activities.
To launch an LLC, a document called Articles of Organization will be filed before the state and the required fees must be paid. Ongoing taxes are imposed by many states, this include annual report tax, and or franchise tax.
Although these costs might frequently not be so pricey for smaller businesses, the LLC formation is more costly in contrast with a sole proprietorship or general partnership, each of which are not really required to file for formation documents before the state. LLC owners in Arizona and New York are also required to publish notice of the LLC formation in local newspapers for weeks and this is usually very pricey.
Cost aside, it should also be known that transfer of ownerships in an LLC is a more challenging task compared to other types of corporations. For businesses formed as corporations, ownership is as effortless as acquiring shares of stock. However, in the case of an LLC structure, there must be an agreement and an approval amongst all the owners before the addition of new proprietors or changing the percentage of ownership of existing proprietors.
Furthermore, considering that the LLC is actually a more recent type of business model, legal precedents are not as much as corporations. Depending on how you view it, this can be a good or a bad thing. Regardless, if you strategy is to structure your company as an LLC, you are faced with the choice of either doing it yourself or employ the services of someone else to do it for you. If it were to be up to us, we would advise the latter as a more practical option; at least that focus can be diverted back to running and managing your business rather than to be running helter-skelter to government agencies.
If you are currently operating your business as a sole proprietorship, it is of great benefit to you if you decide to change it to an LLC. The LLC is structured in such a way that it is in the middle of the road. Though your assets are protected, there remain the flexibility of overseeing a business hands-on rather than being handled by board of directors (which is the case for corporations).
Until recently, transforming a business into a corporation was the only reasonable protection entrepreneurs possess for limiting their personal liability in business. But with the advent of LLC, business owners are now able to fortify themselves against all present and future liabilities from their business without the necessity of incorporation. In addition, with more and more states acknowledging the LLC structure, the tax benefits to your organization are endless.
Being an individual business proprietor, the LLC offers a one-person LLC form, taxed like a sole proprietorship. Payments can made through the profits of your company that are in turn taxed at the owner’s lower marginal tax bracket. Benefits will also occur from the pass-through of your business losses.
In the case of companies with multiple proprietors, similar tax benefits are provided by the LLC form and other advantages of the corporate form. If nothing is done by the proprietors or people of the LLC, their LLC is as a result taxed like a partnership by default. Nevertheless, it is possible for them to elect for the LLC to become taxed as a corporate organization, which is oftentimes the most preferred option. Also, within that options are two other sub-options; to be taxed either as an S-corporation or maybe a C-corporation.
If the proprietors of an LLC decides to keep profits of the business within the LLC so as to enable the facilitation of the development of the business, the most preferred and most befitting option is the C-corporation. With this type, profits of the LLC are subject only to the minimal corporate tax of 15%, which is presumably lower than the personal marginal tax rates of the owners. And when proprietors or people of the LLC desires to receive compensation, they may be compensated W-2 wages for their efforts to the business.
Notwithstanding, if the proprietors of the LLC desires to collect some of the profits from the business, the most befitting option is the S-corporation. Each owner or member gets their professional rate share from the bottom line profit of the LLC as a distribution of profit, taxed as personal income, but not charged as a self-employment tax. If organizing an LLC is what you think is best for you, then proceed and do all the required work to organize your business that way.