Limited Liability Companies (LLCs) offer business owners numerous advantages that other business structures do not. While sole proprietorships, corporations, and partnerships all have their advantages and disadvantages, LLCs have a distinct set of benefits. Here are the top six advantages of forming an LLC.
📌 Pro tip: Want to start or switch to an LLC? Check out our ultimate guide to starting an LLC.
1. Personal Liability Protection
Arguably one of the most important benefits of forming a Limited Liability Company (LLC) is the personal liability protection that it offers you as the business owner.
If your business gets into legal hot water for one reason or another, your business assets can be at stake, but your personal assets will not. The only exception to this occurs when business owners do not operate their LLC appropriately.
For sole proprietorships and partnerships, there is no legal difference between you and your business. In the eyes of the law, you are essentially the same "person" or entity. The means that if your business were to be sued, your personal assets could be in jeopardy in addition to those of your business.
2. Less Paperwork
A C-Corporation also provides legal protection for its shareholders, but they have a lot more paperwork and regulations to abide by. A corporation is likely going to be too much work for the average small business owner given that 81% of small business owners don't have employees.
LLCs have some formalities but do not have the same regulations and filing requirements that corporations do. For example, corporations must hold annual meetings with their shareholders, create annual reports, and more. LLCs do not have to in most cases.
3. Pass-Through Taxation Option
Another major advantage of an LLC is the various tax options that it affords you. LLCs do not have their own IRS tax classification, so they have the option to elect the tax status of a sole proprietorship, partnership, or C corporation.
The IRS automatically assigns LLCs the same pass-through tax status as a sole proprietorship. This means that the LLC holds no income tax liability; the income and tax are passed through to the owners and are recorded on personal tax returns.
In contrast, shareholders of corporations are taxed twice. They face corporate taxes and personal taxes.
4. Less Administrative Hassles and Paperwork
The paperwork required to start and maintain an LLC is much less labor-intensive and less expensive than a corporation. When you start an LLC or change to an LLC, you will file the Articles of Organization and pay the registration fee with the Secretary of State's office for your state. After that, not much is required to maintain an LLC.
Corporations file articles of incorporation, similar to an LLC, but they tend to be more complex. Additionally, corporations must hold annual shareholder meetings, hold meetings to elect corporate officers, hold a board of directors meetings, record meeting minutes, and a lot more to keep the corporation in good standing.
5. Ownership and Management Flexibility
Limited Liability Companies have flexibility in regards to their ownership and management. LLCs can essentially have an unlimited number of owners and the owners can even be from different countries (check with your state's regulations).
S-Corporations, in contrast, can't have more than 100 shareholders and face other restrictions.
LLCs also have flexibility in the way they are managed. While corporations have a rigid management structure, consisting of a board of directors, an executive team, managers, and so on, LLCs can be managed however the members (owners) decide. They do not have a formal structure so owners have more choices on how to run the business.
6. Flexibility in Profit Distribution
With an LLC, the owners can decide how to distribute the profits of the business. This gives much more flexibility than a corporation, where profits must be distributed based on each shareholder's ownership percentage.
For example, if an LLC has four owners with equal ownership (each owns 25%), those four owners can decide to distribute the profits any way they see fit. In a corporation, all would receive 25% of the profit.
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