An LLC is a business structure that protects its members from being held personally responsible for its debts or liabilities. They are permitted under state structures and the regulations governing them differ depending on the state.
The United States is home to many budding entrepreneurs with innovative ideas. Entrepreneurs need to make sure that they find out the best way to establish their very own business for the best chance of success. For this reason, many entrepreneurs choose to turn to limited liability companies (LLCs). LLCs are a popular business structure choice for small to medium businesses because it protects the personal assets of the members and the tax rates are lower than those of a large corporation.
With all of the flexibility that an LLC provides, many business owners seek to start their very own LLC with the hopes of growing a successful business filled to the brim with opportunities. In the United States, it is possible to start an LLC in any state, from anywhere in the country. This is especially useful considering the fact that the digital age is blooming and starting online businesses can be very beneficial.
There are approximately 21.6 million LLCs in the United States. In contrast, there are roughly 1.7 million traditional C-Corporations, and roughly 23 million sole proprietorships. Since 2014, LLC formation has been growing steadily year by year and it is easy to see why. Below are some benefits of the LLC business structure.
1. Limited personal liability
An LLC is seen as a separate legal entity apart from its members. This means that personal assets can’t be used to settle business disputes or any financial losses the business incurs.
If the business is unable to pay its creditors, they are able to go after the business assets, but the owners assets are generally protected. For this reason, many new small business-owners choose to start an LLC. If anything goes wrong, there will be peace of mind knowing that personal assets will be protected.
As with any business there is a fair amount of risk to consider and LLC’s are no different. Although the members are fairly protected, the business can suffer severe financial losses and often bankruptcy if the business is not well protected.
The best way to protect business assets is through LLC insurance. The most common type of insurance is General Liability Insurance which protects a business against the following risks:
- Bodily injury (When a non-employee is injured)
- Medical costs (Costs that arise from a person being injured on the business premises)
- Damage to property (This covers the LLC’s property as well as damage to property that belongs to someone else)
- Legal fees (Lawyers and judgments)
- Advertising injury (When advertising causes another entity damage)
- Personal liabilities (Copyright infringement or slander)
Many of these above-mentioned incidents are out of the control of the actual LLC. Just because there are elements that a business cannot control does not mean that the business owners cannot control how they react to such situations. This is exactly why LLC insurance is so crucial, especially for new and small businesses starting out in the field.
2. Better tax rates
An LLC is not seen as a separate entity for tax purposes. There is no specific classification for an LLC so it is able to adapt any tax structure it chooses. This includes sole proprietorship, partnership, S-Corp, or C-Corp.
The members are able to decide which tax structure best suits their situation which makes an LLC extremely flexible in terms of tax regulations. There are however some limitations such as an LLC with multiple members (owners) can’t be taxed as a sole proprietorship.
In contrast with a C-corporation, LLCs are not subject to double taxation. This can save a substantial amount of money in the long term.
3. Easier to register than other business entities
Organizational documents and Corporate filings can be costly and time consuming, but large corporations are required by state law to have these in place. In contrast, the LLC does not have to meet the stringent regulations of the corporation and are typically only required to hold regular board meetings, create annual reports, and pay yearly fees which are all standard practice for a corporation.
Avoiding these time consuming formation processes makes it much easier to register an LLC than any of the other business structures. The fees associated with registering an LLC are relatively light although they do vary from state to state quite significantly. An accountant or lawyer can assist with streamlining the process.
Better yet, there are many different LLC formation services that can assist in the establishment process. Certain formation services help entrepreneurs build a good foundation during the initial phases when they start their very own business.
4. Management flexibility
Where corporations are governed by the articles of incorporation, the LLC is governed by an operating agreement. This is easier to set up and modify when the business evolves and grows.
An LLC can either be managed by members who will make the day to day decisions regarding the business or it can be managed by managers. The manager/s is selected by the members to run the business and make daily decisions.
This flexibility allows members to hire managers that are well experienced in running a business. When starting out a new business, entrepreneurs have to take a variety of factors into account. This added sense of flexibility allows new business owners to focus on many different things at once with ease.
Final thoughts
Forming an LLC is a relatively simple process and the business structure provides legal protection to members for their personal assets. There are many tax benefits and in many cases the member/s can choose which tax structure suits their business the best.
The flexibility in terms of taxation also extends to the management structure. Members are able to hire qualified managers with experience to run the business. Visit this site to learn more about LLC insurance, a vital aspect for any LLC in the United States.
