Why the LLC is so desirable
Limited Liability Companies, or 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 relatively low maintenance from one year to the next.
For the government, the LLC makes a lot of sense, too, because it incentivizes entrepreneurship. After all, small business was (and still is) the backbone of the American economy. Since LLCs are much easier to get going than most other types of business, they make it more likely that small business owners will take a risk and ultimately succeed. As LLCs grow and begin to thrive, they bring more money into the economy, create new jobs, and can contribute to the tax base.
Of course, an LLC isn’t the only option for individuals looking to open their own business. There are other choices too, such as:
- Sole Proprietorship
- General Partnership
- Limited Partnership
These alternative structures can make sense for certain businesses, but because the advantages of LLC are so numerous and accessible the LLC is the 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, creditors and litigators cannot come after your personal assets or finances to satisfy a dispute with your LLC.
- Protection of LLC assets. An LLC not only protects the LLC’s owners from the liabilities of business, but also protects the business 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.
Read more about LLC taxation ⟶
- 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 corporate 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 a good credit history for your company.
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