Do I need an LLC?

An LLC is a legal form of business that combines the liability protection of a corporation with the ease of operation of a sole proprietorship. Thus, it helps protect your assets against losses from business liabilities and debts, without the extra paperwork, expense, and double taxation that can be associated with operating as a corporation.

Why create an LLC?

The primary reason to create an LLC is that it sets up your business as a separate legal entity. In other words, you create a legal distinction between you and the business.

With an LLC, if there’s a lawsuit against the business, it’ll generally be brought against the LLC. That helps prevent you from losing your savings, home, or other personal assets if there’s a settlement against the business.

By contrast, as a sole proprietor, you and the business are one and the same. A lawsuit against the business — even if you’re using a DBA name — will be a lawsuit brought against you. So, you could stand to lose everything you own.

If there’s a possibility — even a remote possibility — that a product you sell, a service you perform, or some other aspect of your business could result in any type of harm or loss to others, you should consider forming an LLC.

Advantages of an LLC

Whether you’re launching a new business, or you’ve been operating as a sole proprietorship, there are many advantages to forming an LLC. You can gain these advantages whether your business is a full-time venture or a sideline business.

Liability Protection

As we’ve discussed above, the limitation on personal liability is one of the chief advantages of an LLC. Because it’s a separate legal entity from its members, an LLC’s liabilities and debts are the responsibility of the LLC. Thus, the LLC helps shield your personal assets from loss.

The liability protection can be lost, however, if members personally guarantee financial obligations, are negligent, commit fraud, or intentionally inflict injury or damage.

Ownership Flexibility

Owners of LLCs are called members. An LLC can have any number of members. There’s no cap or minimum number of members to form an LLC. So, you can form an LLC even if you’re the only owner of the business. In fact, many one-person businesses choose to operate as an LLC instead of a sole proprietorship. (A sole proprietor is someone who owns a business alone and hasn’t chosen to form an LLC, corporation, or another kind of business entity.)

LLCs have to conform to state and federal regulations regarding ownership, but most LLCs have few restrictions on ownership. Members may be individuals, partnerships, or corporations, and there’s no restriction on what country the members reside in.

Professional LLCs (PLLCs) are an exception, however. Membership and other rules governing PLLCs vary by state.

By contrast, a sole proprietorship is limited to only one owner. Sole proprietors have to form a partnership, LLC, corporation, or another entity if they want to bring additional owners into the business.

S corporations limit the total number of shareholders to 100 and don’t allow shareholders who are partnerships, corporations, or non-resident aliens.

Management Flexibility

LLCs have a lot of flexibility in how they’re managed. A multi-member LLC doesn’t have a board of directors and can choose how it wants to be managed. It can choose to be managed by all the members, some of the members, or even by an outsider. It can also choose how profits will be divided among members. Members can either actively participate in the business or be passive members of the business.

If a member withdraws from a multi-member LLC, in most cases the LLC can continue without having to dissolve the LLC.

Once members choose how they want to manage the LLC, the details are documented in the LLC’s operating agreement.

Federal Income Tax Options

For tax purposes, by default, an LLC is considered a pass-through entity. The business doesn’t pay federal taxes on its profits; instead, all the profits pass through as income to the members of the LLC. Each member reports the profits or losses they receive on their individual tax return. They pay the income taxes and self-employment taxes (Social Security and Medicare) due on their portion of the LLC profits. This avoids the double taxation you may have heard about that’s associated with C corporations (the default form of corporation), in which profits are taxed at the business level and again at the individual shareholder level.

Although pass-through taxation is the default way of handling LLC income taxes, there’s an alternative. The LLC can choose to be taxed as an S corporation. In that case, members may be able to reduce the amount they pay into Social Security and Medicare by splitting their earnings between salary and distribution.

Learn more about the tax savings of an S corporation by using our interactive tax calculator.

Instilling Customer Confidence

Being able to add “LLC” to the end of your business name gives your business a marketing advantage. It helps your business to be perceived as bigger, more established, and professional than a sole proprietorship. It helps forestall customer worries that your company might not be up to doing their work or that your business might close up overnight.

What can I do with an LLC?

An LLC is the legal structure for a business. You can and should use your LLC to conduct all the activities of your business.

Such activities would include:

• Opening a business bank account
• Managing business finances
• Billing customers
• Leasing business space
• Accepting credit cards
• Signing contracts
• and other activities you’d engage in to start, market, finance, and manage your business.

Can you do without an LLC?

If you’re the sole owner of your business, there’s nothing to stop you from operating as a sole proprietorship.

In general, you may not need an LLC if you’re just starting out, you’re the only owner and worker involved with the business, and there’s absolutely no chance that what you sell could cause harm or physical or economic injury to anyone.

But if you’re concerned about protecting your assets, or your business could be sued for any reason, you should consider forming an LLC or even a corporation.

Disadvantages of an LLC

Forming an LLC involves some initial paperwork and ongoing compliance requirements that you won’t have as a sole proprietor.

There are also some fees involved that a sole proprietor doesn’t incur. States charge a fee to form an LLC, for instance, and a few states require you to publish a notice in newspapers announcing your intent to form an LLC. You may incur some other startup and ongoing costs to form an LLC, too.

Although there are costs involved with forming and operating an LLC, those costs are minimal when you consider the benefits of the liability protection and peace of mind you derive as an LLC.

Comparing Business Entities

Sole proprietorships are the easiest and least expensive type of business for a single owner to set up. But in a sole proprietorship, you’re responsible for paying all business debts and losses. In addition, your business may look smaller and somewhat inconsequential without the “LLC” or “Inc.” designation after the business name.

General partnerships, like sole proprietorships, can initially be easier to start and run than a multi-member LLC or limited liability partnership. However, the big drawback is that each partner is personally responsible for the business actions and debts any other partner creates

A corporation may be preferable to forming an LLC for some businesses. This is particularly true if your business needs to be recognized as an official entity outside of the United States. It’s also a consideration if your business will be seeking investors, since many investors prefer the corporate structure for the companies they invest in.

Make a better decision about the right form of business by learning more about the differences between business structures.

How ZenBusiness can help

ZenBusiness is an all-in-one service that helps you launch, manage and succeed in your business. You can rely on our formation services and team of experts to help you set up your business properly with your state. In addition, we offer a range of services that’ll help you manage your finances and taxes, build a website, and learn the ins and outs of running a growing business.

Disclaimer: The content on this page is for informational purposes only, and doesn’t constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.