LLC Advantages: Everything You Need to Know
It is one of the most popular routes small business owners take because of the liability protections afforded to them.3 min read
What are LLC Advantages?
There are numerous LLC advantages for aspiring entrepreneurs. It is one of the most popular routes small business owners take because of the liability protections afforded to them. Further, LLCs come with minimal regulations when compared to other entities, such as corporations. In addition, sole proprietorships and those in general partnerships can transform their business into an LLC. Many owners, however, assume that LLCs are a costly endeavor, but it is not as hard as you may think.
Advantages and Disadvantages of LLCs
LLCs provide a variety of benefits:
- Personal Protection: A primary benefit of LLCs is the protection of personal assets from creditors or judgments. If, for instance, your LLC faced a lawsuit, the LLC would be sued instead of yourself, and creditors could not seize any personal possessions of yours. General partnerships and sole proprietorships do not offer such protections, and your personal assets are subject to forfeiture in the event of a judgment. In a general partnership, at least one or all members are responsible for debts and liabilities.
- Protection for All Members: Unlike partnerships, LLCs provide full protections for all members regardless of role.
- Flexible Structure: LLC owners are allowed to structure their organization in a manner that suits them. Corporations, on the other hand, must abide by a rigid structure and are regulated in such areas as meetings, compensation, etc. Also, LLC members are not beholden to the same annual mandates as corporations.
- Tax Advantages: LLCs operate under “pass-through taxation,” which occurs when income and losses from the business shift to individual members, where they can file such activity on their personal tax returns. As a result, the LLC itself is not taxed whatsoever.
- Less Paperwork: There is less red tape than a corporate structure.
- Self-Employment Taxes: Due to pass-through taxation, individual members must pay high self-employment taxes. Corporate income taxes are generally lower than personal income taxes. However, members can deduct business expenses on their returns accordingly. Self-employment taxes fund such federal programs as Medicare and Social Security.
- No Stock Options: Unlike corporations, LLCs cannot offer stock to members or the public, which can make raising capital more difficult.
- Role Confusion: Members and/or investors may be confused about who is in charge of the business.
Protected Asset Exceptions
LLCs do not always protect your assets. For example, you may lose protections if you personally accept responsibility for a business loan, or if you breach the terms and conditions of the organization. Such actions would result in that individual being held liable for any debts or damages incurred from bad or unethical business decisions. When creating your LLC, draft an operating agreement outlining the rules of your business. An operating agreement is a document detailing the internal operations of your business, such as:
- Management Structure
- Members Roles
- Rules and Responsibilities
- Payout System
Operating agreements are not mandatory under state law, but it is an important document to have on hand.
Lenient Management System
LLCs differ from corporations in terms of management structure. Multiple owners can simply draft an operating agreements determining roles and duties, but corporations must follow a system of board and directors. A board determines the course of the business and hire officers to manage daily operations of the business. LLC Members can either manage operations themselves or hire manager to run the business.
LLCs provide some additional options for members. For example, members can choose a traditional partnership arrangement for tax reasons. Moreover, members can also file in the same way as a corporation. Talk with an attorney regarding additional tax advantages you can seize under an LLC.
The public and potential customers and clients view LLCs in a credible light. Many view LLC owners as committed to their business and a stable presence when conducting business. Further, LLCs are attractive to overseas investors because LLCs have a long-standing international presence.
LLCs can tailor a profit system to their liking. They can also allocate profits beyond shares of ownership. For instance, an owner with a 50 percent share can absorb 80 percent of the profits. In some instances, an LLC cannot issue profits due to emergency situations, or if liabilities outweigh assets. However, members are still liable for taxation, even if profits are not distributed within the organization. All forms of compensation should be outlined in your operating agreement to avoid confusion and possible legal consequences.
If you want to learn more about LLC advantages, you can post your legal need on UpCounsel’s marketplace. UpCounsel’s reputable attorneys will help you through the LLC process and guide you through all of the advantages an LLC entails. UpCounsel lawyers have an average of 14 years in legal experience and have consulted for such companies as Google and Stripe.