If you’re starting a business or looking to change the corporate structure of an existing company, you might be wondering about the benefits of an LLC. Although there are various types of legal structures you can create for your business (C Corp, S Corp, etc.), there are several unique LLC advantages that you should keep in mind. Depending on your immediate business goals, the type of business you have and how you want your business to grow in the future, the benefits of an LLC might make this the ideal choice of business structure for your needs.
Here are a few of the most common (and some underrated) benefits of an LLC.
Limited Liability Protection
LLC stands for “Limited Liability Company.” By doing business under the protection of this legal entity, you’re limiting the liability of yourself and your personal assets against some of the worst-case scenarios of being in business.
For example, let’s say you’re doing business as a sole proprietor under your own name (without a legal business structure). If a client decides to sue you, they can go after personal assets like your retirement savings and your home. If you’re doing business as an LLC and face a lawsuit, your liability is limited to the assets of the business — this is known as the “corporate shield.”
The LLC structure is unique because it allows owners to operate their company in a variety of ways, depending on the needs and goals of the business. Many small business owners who are solo entrepreneurs or solo practitioners (such as consultants or real estate agents) operate their LLCs as “single-member LLCs.” No business is too small to use an LLC! Other larger businesses can also use an LLC to share ownership among multiple members or shareholders.
An LLC is also uniquely flexible with its ownership rules, because it allows foreign nationals and other corporate entities to have ownership in the company. So if you want to do business with international partners, or structure multiple businesses under one umbrella entity (such as a Series LLC), an LLC is a good choice.
Business Credibility and Legitimacy
Compared to doing business as a sole proprietor, forming an LLC can give your business an added level of legitimacy. Starting your company as an LLC makes your business “official” as a separate legal entity that is distinct from your own identity as an individual person, which can be helpful in building a brand for your business. Even if you’re a small business owner who’s working from home, being an LLC can have the positive effect of making your business look bigger than you are.
Setting up an LLC shows your customers and partners that you’re serious about your business – you’re not just doing this for a hobby or as a fly-by-night operation. Unlike a simple DBA (Doing Business As) arrangement or a sole proprietorship, setting up an LLC gives you the ability to get a business checking account and a business credit card, making it easier to keep your business and personal expenses separate and also build credit under your business name. These are just a few of the underrated LLC advantages that come from having a more official way to manage your everyday business operations and deal with your business finances.
LLCs offer a few unique advantages that can potentially help you save money at tax time. First: LLCs are treated as pass-through entities for tax purposes. This means that unlike C Corporations, LLCs do not have to pay corporate income tax – the LLC’s income simply “passes through” to its owners’ individual tax returns. This means that your LLC gets to avoid the double-taxation that C Corps are hit with: the corporation itself pays corporate income tax, and then the company’s shareholders also have to pay tax on corporate dividends.
Another popular LLC advantage is the flexible treatment of how to file taxes. You can elect to have your LLC file taxes as an S Corporation, which enables you to potentially reduce the amount of self-employment tax that you owe. Talk to your accountant about how to set this up and how to comply with the relevant IRS rules and expectations. If you handle it correctly, you can get the best of both worlds — LLC flexible ownership with certain S Corporation tax advantages.
However, depending on your tax bracket, LLC income might get taxed at a higher marginal rate than it would have if that income were earned by a C Corporation. (In other words, there might be situations where an LLC owner is paying a higher marginal tax rate on their individual income tax than a C Corporation would owe in corporate taxes.) Consult with a professional tax adviser if you have any questions about the tax implications of your choice of business structure.