What Are The Advantages Of Forming An LLC?
Are you thinking about starting a business? If so, you’re probably feeling a little overwhelmed. There are just so many decisions to make and those choices affect how you choose to incorporate. This step doesn’t have to be complicated, though, particularly if you choose to start your own business as an LLC. (Image Credit: Raw Pixel/Pixabay)
LLCs, or limited liability companies, are a comparatively new business model relative to the C-corp or S-corp models, but they’re also one of the simplest to form. More importantly, LLCs offer these 4 advantages to small businesses that can help secure your operation.
Personal Liability Protection
One of the most common reasons that people choose to form LLCs rather than incorporating under another heading is that the LLC form offers personal liability protection. That means that if your business falls behind on its debts or has to file for bankruptcy, your personal assets are protected. Of course, in order to take advantage of this, you need to maintain firm divisions between your professional and personal funds, but with good bookkeeping habits you’ll be in the clear.
Quick And Affordable
Another major reason that small businesses opt to form LLCs rather than to operate under another business model is that LLCs are the most straightforward type of company to form. For example, in California it costs $75 and takes 15 days to file for an LLC – or just 5 days if you pay for expedited filing. Biennial compliance filings are also affordable, at just $20 per filing, and there are fewer compliance requirements since LLCs can’t issue stock and generally have a smaller scope than C-corps or S-corps.
Alternative Tax Structures
While some LLCs resemble conventional companies, others are essentially a way for freelancers to formalize their services. One major reason that individuals choose to do this is because LLCs allow for alternative tax structures, rather than just directly paying self-employment taxes.
Among the options available to LLCs is pass-through taxation. Pass-through taxation allows LLCs to skip corporate tax filings and instead file for their business under their personal income tax. Depending on income, this may allow the LLC owner to file with a much lower tax rate than they would if they were filing corporate taxes.
The Credibility Advantage
Finally, when businesses choose to form an LLC rather than a sole-proprietorship, experts suggest that the business is also viewed as more legitimate. This manifests in several ways. First, clients may feel more comfortable doing business with an LLC than a sole proprietorship, since many well-recognized businesses are LLCs. Second, when you file taxes as an LLC, there are tax advantages that LLCs can take advantage of while facing less scrutiny than a sole proprietorship would. It won’t completely protect you from an audit, but it can make you less conspicuous.
Forming an LLC is a simple way to formalize your business, whether you’re a freelancer who is seeking a little more structure or a group of friends who want to invest together. And with so many people working for themselves today and so many advantages to the LLC model, we’re likely to see an explosion in small LLCs in the next few years.