What are the Benefits of an LLC?

Top 8 LLC Benefits

An LLC has become a popular choice for startups because of the many benefits this form of business offers. Among them are personal liability protection, potential tax savings, reduction in paperwork and red tape, and the perception that your business is more established than someone operating as a DBA. Here, in more detail, are the top benefits of an LLC.

1. Personal Liability Protection

Personal liability protection is one of the main advantages of an LLC. Like a corporation, an LLC is a separate entity from its owners. Because it’s a separate entity, the debts of the LLC are its own. If the company were to default on loans or credit cards or go bankrupt, creditors can go after the business assets. The bank accounts, homes or other personal assets of LLC owners are generally protected unless the owners have personally guaranteed loans or other debts.

2. Legal Liability Protection

Similarly, if a product or service your company sells or something an employee does causes physical or financial harm to a customer, the company can be sued. Depending on circumstances, the legal costs and any settlement could be hundreds of thousands of dollars or more. The LLC and not its individual members would be responsible for paying those expenses. The exception: If a member of the LLC personally committed the wrongdoing or was negligent, the plaintiff could go after their assets, too.

3. Tax Benefits of an LLC

Another advantage of an LLC is the tax treatment. For tax purposes, an LLC is treated like a sole proprietorships or partnership. In other words, the business, itself, doesn’t pay federal income taxes. The profits pass through to the owners and are reported as income on their personal returns. Thus, the business profits are taxed only once, at the personal income tax rate. This avoids the double taxation associated with C corporations. In a C corporation, the company pays income tax on its profits. Then, when those company profits are distributed to shareholders (i.e., the company owners), the shareholders are taxed again on the distributions.

If you are a one-person LLC operating as a self-employed person, you don’t have to file a separate business tax return for the business. That saves time – and if you have an accountant handle your taxes – money. S corporations -even with just one owner – must file an information tax return by March 15th each year. Note: Multi-owner LLCs have to file partnership information returns every year. There’s another tax benefit, compared to a C corporation, too. LLC owners are often eligible for the Qualified Business Income deduction (QBI). The QBI allows them to deduct up to 20% of their business income on their tax return.

4. Decision Making and Management Flexibility

If you are a one-person LLC, you can make all the business decisions on your own, just as you would as a sole proprietor. You don’t have to have anyone else approve or sign off on decisions. If the LLC has multiple members, the members can decide who will be responsible for managing it. An LLC doesn’t have to have a board of directors. The members can choose to have one member manage the business, all the members be managers or even have a non-member be the manager.

5. Less Paperwork and Fewer Administrative Tasks

An additional advantage of choosing an LLC for your business entity is that there’s less ongoing paperwork and fewer annoying administrative details to handle compared to forming a corporation. In a corporation, you are required to have a board of directors, hold annual meetings, and discuss and vote on important business issues (such as taking out a bank loan, for instance). You also need to record and store the minutes of all those meetings. You don’t have to do any of those things in an LLC. Yet another LLC advantage: if all the people who work in your business are LLC owners and you haven’t chosen to be treated like an S corporation, no one gets paid a salary. (Money paid out to owners during the year is a draw against profits.) So, you don’t have payroll expenses, payroll tax reports and the related administrative headaches to content with.

6. No Ownership Limitations

There are no ownership restrictions for LLC members. Limited Liability Company owners can be individuals, corporations, or other LLCs. Owners don’t have to be citizens of the United States or live in the country to be an LLC owner. By contrast, in an S corporation the number of shareholders is limited to 100, and all the shareholders must be resident of the United States. Additionally, only individuals can be shareholders.

7. More Choice in Profit Sharing Options

LLCs have an advantage over S corporations when it comes to profit sharing options, too. In an S corporation, only one class of stock is allowed, and profits are distributed proportionately to the percent of shares each shareholder owns. In an LLC, the members of the LLC can decide how profits will be divvied up. The LLC members might decide to split profits based on the amount of time each works in the business instead of the amount of money each contributed, for instance.

8. Marketing advantage

The addition of the LLC designation to a business name can give your business a marketing edge over a sole proprietorship. It makes the company appear to be bigger, more permanent, and more reliable than a sole proprietorship.