Why Start an LLC?

By Lisa Magloff

There are several different ways to structure a company: for example, you can set up an S-type or C-type corporation, a general partnership or a sole proprietorship. However, there are several advantages to organizing your business as a Limited Liability Company (LLC). These include tax advantages, limited personal liability and administrative advantages.

There are several different ways to structure a company: for example, you can set up an S-type or C-type corporation, a general partnership or a sole proprietorship. However, there are several advantages to organizing your business as a Limited Liability Company (LLC). These include tax advantages, limited personal liability and administrative advantages.

Liability Protection

An LLC is a legal entity distinct from its owners. In an LLC, the owners of the business (which in an LLC are called members) have only a limited responsibility for the debts and other liabilities of the company. Members are not held personally liable for any debts or court judgments against the business. This means that your personal assets are protected. In many cases, owners are also shielded from being sued personally for any wrongs committed by the business. For example, if the LLC owns real estate and a tenant trips and injures themselves, that tenant can sue the LLC but usually not the owners personally. In addition, if the business fails, the debts do not have to be carried over into your next business venture.

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Member Flexibility

An LLC may have any number of members – starting with just one. In some states the LLC owner may also be another LLC. In contrast, S-corporations are limited to 100 stockholders, each of whom must be a U.S. citizen or resident. Most states do not require LLCs to hold annual general members meetings, and most states also require less paperwork and record-keeping of LLCs than of corporations. Members themselves can decide the ownership structure, voting rights and other aspects of their business relationship.

Tax Savings

According to the Internal Revenue Service, LLCs may be taxed as a “pass-through” entity. A pass-through entity is one in which any profits, losses, deductions and tax credits can be reported on members' personal tax returns rather than on a corporate tax return. This allows members to pay taxes at their individual tax rate, which is often lower than the business tax rate. It also avoids double taxation, which imposes both a business tax on company profits and personal income taxes on owners or shareholders. If you are actively participating in running the LLC, you may also deduct operating losses against your income, saving you more money.

Ease of Transfer

In an LLC structure, owners can usually sell or transfer ownership interests to a third party with a minimal amount of administration and paperwork. According to investment experts NuWire Investor, this makes it easier to leave your business to your beneficiaries, or to sell your share in a business. NuWire points out that some families hold their assets, such as real estate, as an LLC. When one family member dies, the assets can then pass directly to the remaining family members, who are also members of the LLC, without the need to pay inheritance taxes. Membership interests can also be placed in a living trust for your heirs, so that they pass directly.

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Pros & Cons of an LLC

References

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