Benefits of LLC: Everything You Need to Know
When it comes to the benefits of LLC, you must first be aware of how the process works. 3 min read
Benefits of LLC
When it comes to the benefits of LLC, you must first be aware of how the process works. An LLC is formed through the issuance of an Articles of Organization document filed with your state’s LLC office. The benefits of LLC include limited liability protection, a flexible operating structure, and certain tax advantages. An LLC comprises of member (owners) who operate the business according to an operating agreement.
When it comes limited liability, creditors cannot go after your personal assets to offset debts owed from the business. However, this is not the case with sole proprietorships and general partnerships, where owners are legally responsible and can have their assets seized if a judgment occurs. Under LLCs, taxes are paid personally rather through the LLC itself.
Forming an LLC may help in providing credibility to the public, showing that you are committed to your business.
Disadvantages of Creating an LLC
To assess the benefits of LLCs, we must also look at their disadvantages.
While LLCs provide a wide array of advantages, you must be aware of the drawbacks:
- Ongoing Fees: States may levy reoccurring fees in the form of franchise taxes and annual report fees.
- Startup Expenses: The formation of an LLC can be expensive than general partnership or sole proprietorship.
- Transfer Difficulties: LLC owners may have a harder time transferring ownership when compared to a corporation. On the other hand, corporations allow members to sell shares to increase shareholders.
- Higher Taxes: LLCs are subject to self-employment taxes
- Pass-through Taxation: Profits are passed form the business to individual members, which may cause members to pay higher personal income taxes. Corporate taxes are generally lower than personal taxes. Individuals are required to pay for such programs as Social Security and Medicare.
Speak to a legal expert regarding the benefits and costs of setting up an LLC for your business.
The IRS does not classify an LLC as a different entity when it comes to taxation. In other words, the IRS will not levy direct taxes on an LLC. Instead, members get to determine how the taxes will be paid.
- Single Member LLCs: This is a type of structure applies the pass-through method.
- Partners LLC: Members would choose to be taxed like a partnership.
- LLC Corporation: Members can file as a corporation, which also safeguards them from business liability
- Profit-sharing: Members can establish a profit-sharing system that works for all parties involved. Outline your pay-out system in the operating agreement, which is your company’s internal document that determines management structure, roles, and responsibilities, etc.
In addition, LLCs do not face federal taxation. This is in stark contrast to C corporation, where they are taxed as an entity and on dividends paid to shareholders. An LLC is easier to manage than a corporation. For example, corporations need officers, board of directors and conduct regular meetings, while LLCs can be tailored made to member specification. Members do not need permission from a board when making business decisions, and LLCs are easier to manage than a corporation. In addition, LLCs do not have restrictions on the numbers an organization can have.
LLC members can also be foreign nationals, including other entities.
Involvement of Members
Members are afforded personal liability without any limits on their involvement in the business. In contrast, a standard partnership do not allow partners to engage in further activities without jeopardizing his or her liability protection. However, LLCs give members the maximum protection they need and can still run the business accordingly.
You can use your LLCs to build your business credit profile. Moreover, business credit aids in eliminating personal liability on debt-based business. Further, business credit can help you gain access to financing if you need it in the future.
Good Alternative for Foreign Investors
LLCs are fairly recent in the United States, but these entities have been in other places around the world for much longer. However, LLCs are new when compared to partnerships and corporations. Overseas investors tend to invest in LLCs because of the familiarity. Further, LLCs are less restrictive to foreign investors, allowing access to markets.
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