8 Reasons Why The LLC Is So Desirable
Limited Liability Companies (LLCs) are the most common type of business in the United States, and they are an especially popular choice for startups and small businesses.
For individual owners, the LLC is easy to live with. It gets them the liability protection and taxation benefits they need, and it’s also affordable to set up, super flexible, and low maintenance from one year to the next.
Of course, an LLC isn’t the only option. There are other choices, such as:
- Sole Proprietorship (Sole Proprietorship vs LLC)
- C-Corporation (C-Corp vs LLC)
- S-Corporation (S-Corp vs LLC)
These alternative structures may make sense for certain businesses, but the advantages of LLC are so numerous that the LLC is most often the best option.
Let’s take a look at the advantages of LLCs and why you might choose an LLC over the alternatives.
Advantages of an LLC:
- Personal asset protection. True to its name, an LLC protects its owners from the LLC's liabilities. While there are some situations in which an individual owner can still be held liable for his or her LLC obligations, for the most part, the LLC's creditors cannot come after your personal assets or finances to satisfy an LLC obligation.
- Protection of LLC assets. An LLC not only protects the LLC’s owners from the LLC's liabilities, but the LLC also protects the business and its assets from the personal liabilities of the LLC’s owners. Unlike a corporation, the LLC structure protects the LLC’s assets from the owners’ personal liabilities too! For instance, suppose you own 50% of ABC, LLC. If you are personally sued for a personal obligation (i.e. a car wreck or contract you signed personally) and this personal creditor obtains a large judgment against you that you cannot afford to pay, the creditor can seize your personal assets. In almost all states, your ownership interest in ABC, LLC cannot be seized by your personal creditor. As such, the assets owned by the LLC are insulated from the owners’ personal liabilities. The only mechanism the creditor could use against your LLC interest is called a charging order. A charging order directs the LLC to pay to the creditor any distributions of income or profit that would otherwise be distributed to the LLC member/debtor.
- Simplicity. LLCs are relatively easy to setup and maintain. While you do want to be careful and prudent when establishing the LLC and filing the necessary paperwork, LLCs require far less paperwork than an S-Corp or a C-Corp.
- Only taxed once (pass-through taxation). 100% of the LLC’s profits go directly to its owner(s). You then get to report those profits as part of your individual tax return. Compare that to a C-Corporation, where profits are taxed before they get distributed to owners and again as part of the owners’ individual incomes. In other words: LLC profits get taxed once while C-Corp profits get taxed twice.
- Flexible tax treatment. If an LLC prefers the federal tax rules that apply to an S-Corporation or C-Corporation, no problem. LLCs can now elect to be taxed as an S-Corp (or C-Corp) without actually having to be a corporation.
- Less formality, fewer regulations. Unlike corporations, LLCs do not require regular meetings, minutes, resolutions, assignment of corporate officers, etc.
- Flexibility. LLCs can have one owner or multiple co-owners (unlimited). They can be governed by the owners or by a separate person or group of people (called "managers") appointed by the owners. It’s also easy to bring people in and out of the company.
- Credibility. Individuals, investors, customers, and partners are usually more comfortable working with an LLC than with a sole proprietorship. You can also open a business line of credit as an LLC, thereby building credit for your business.
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