LLC Benefits: Everything You Need to Know
LLC benefits provide business owners with flexible options for taxation and administration when they choose this type of incorporation.8 min read
LLC benefits provide business owners with flexible options for taxation and administration when they choose this type of incorporation.
LLC members get to choose how they would like to be taxed, and, fortunately, they have three options.
- Option one: Single Member LLC. Taxed as if it were a sole proprietorship, in this option profits and or losses aren’t taxed, but are taxed through the person’s federal tax return.
- Option two: Partners in an LLC. All members are dealt with by the IRS as if they were in a regular partnership.
- Option three: LLC filing as a Corporation. All members record their taxes as they would if they were in a conventional partnership for a corporation.
Generally, all members of an LLC will file the same as one another, meaning they will have an overarching operating agreement that establishes how the company will be dealt with by the IRS for tax assessment purposes. Note that there are some LLC companies that the IRS will automatically classify.
Unlike S-Corps or C-Corps, LLCs are more flexible. Just be sure to have an LLC operating agreement that your business operates under. This way you can determine how your business operates. If you don’t, your LLC will operate by the standard rules in your state.
Similar to an enterprise, LLC companies are able to provide individuals within insurance from risk, meaning that individuals within an LLC are not endangered by court rulings against the LLC itself. If the company hits hard times, banks cannot take away any possessions or land that members of an LLC may possess to recoup losses on a loan. This is in stark contrast to what would happen if the company was considered a ‘sole proprietorship’ or ‘customary organization.’
Depending on what tax option you choose, LLCs are generally taxed much the same as people who work for themselves (aka a self-employment tax). Each member of the LLC, therefore, will be taxed on a personal tax return because the LLC is not being taxed the same as a corporation. Unfortunately, these taxes are actually higher than they would be as a corporate tax. Each person within the LLC will pay for Medicare, Social Security, and other federal items. This is why many people just starting out will pay to speak with an accountant or lawyer to discuss what to expect with each tax option, and whether or not there are better choices out there.
Confusion About Roles
Because LLCs aren’t corporations, they generally don’t have strictly defined roles. People just tend to do what needs to be done, and, if asked, no one would really know to whom to point if asked who was in charge. This is why many veteran LLCs suggest that upcoming and newly established LLCs outline what role each person has, and to actually go so far as to put it in writing. This written contract is referred to as an LLC Operating Agreement.
Perhaps a major flaw with LLCs is that if only one person leaves, the whole LLC goes crashing down and will actually go out of business altogether. This, then, is another reason it is recommended to have an LLC Operating Agreement because it can be put in writing what happens if one person leaves.
LLCs are a good choice because they protect their members from negative fallout should things go awry, and they give various tax choices to choose from. That said, that doesn’t mean that deciding to go as an LLC is actually the best choice for you and your company. Probably the best thing to do is to speak with a lawyer before you make any decisions. Of course, do more research in the meantime, but when the time is right take an afternoon to go and speak with professional legal counsel. Each state is unique in its laws and regulations, and you’ll likely need some professional expertise before you decide to completely jump in.
Being an LLC (or limited liability company) is neither costly nor time intensive. In fact, there are many benefits to choosing to be an LLC rather than a general partnership or sole proprietorship, and usually, far surpass any of the repercussions that people associate with LLCs.
As mentioned earlier, LLCs provide some protection to owners so that they are not pursued for any debts arising from the LLC. This means personal savings accounts, houses, cars, land, cannot be taken away from them to pay off any debts incurred from the business. This is in direct contrast with general partnerships and sole proprietorships where owners and their respective business/businesses are legally thought to be the same—meaning if a business were to fail and go into debt, the owner could have his assets seized.
LLCs don’t have taxes of their own. Instead, any profits or losses are reported as personal income. This means that LLC members each have to report any taxes associated with the business as personal federal income tax. It may sound like a drawback, but it’s actually not because it prevents members from having to pay taxes twice
Some would accuse this of being conjecture, but numerous reports from established LLC veterans refute that. When you sign on as an LLC, many people within your community will see it as a long term commitment to your company. You’re not out to make a quick buck, per se, and you and your business are in it for the long haul. Loyalty to one’s convictions can go a long way—especially when you’re just starting out as a company.
Limited Compliance Requirements
LLCs don’t have as many requirements to meet each and every year for the state as S corporations, and C corporations do. It may not sound like much, but when you’re running a business having just a few things off your plate can help a lot, thus preventing burn out and instead encouraging longevity.
Flexible Management Structure
When you’re an LLC, it’s easier to make the structure of your company be how it needs to be. It doesn’t matter who runs the business, as long as the business is running smoothly. Corporations, on the other hand, are different in that there is a board of directors who look at the big picture, and a group of officers who run the business on a smaller, day by day, scale.
S corporations have limitations on how many owners a business or company can have, and who actually can be one. Not so for LLCs.
Potential LLC Disadvantages
As with everything, there are some drawbacks to being an LLC. Let’s talk about them.
Formation and Ongoing Expenses
Depending on the state in which you live, some states (NY and AZ, for example) require LLC members/ owners to publish in local county/ city newspapers their actual formation for several weeks. In some places, this isn’t necessarily expensive, but of course, at the city level can require more than a few bucks to maintain.
Also, to actually establish an LLC, an ‘Articles of Organization’ needs to be filed (and associating fees paid) every year. Again, it’s not necessarily a big deal, but this aspect of maintaining an LLC is more expensive than going the sole proprietorship/ general partnership route.
When an LLC member/ owner dies or quits, it is a lot harder to transfer the ownership to another person. In corporations, this happens all the time, but when it happens to an LLC, all sorts of legal problems can arise (*unless, of course, every member signs an Operating Agreement).
Should a legal problem arise, court rulings may be more difficult since LLCs are a relatively new thing. Corporations, though, have tons of prior cases to aid in legal woes, but for LLCS, the game is really just getting started.
LLC Advantages: Limited Liability
Owners of LLCs are not liable should their business come upon hard times. Should a business debt need to be settled, the owner’s assets cannot be seized to settle any debts. In a normal partnership, however, members can have that happen. LLC members are still at risk when it comes to how much personal money they have in the business itself, but this is not the same as being held personally accountable should the company go into debt or be sued. In a way, being labeled as an LLC is like having a protective legal shield.
LLC members can’t be taxed twice for business profits in a fiscal year. Meaning, members are only taxed individually, and not as a company and individually. C corporations are taxed on their profits, and any windfall that may result is taxed again at the individual level. Do note that LLC can still be taxed at the state and county levels, but generally profits are not taxed again.
LLCs are simpler to run even though there are aspects to them that are similar to corporations, but without all of the rigmarole. Corporations, for example, must always get approval from boards before making any final decisions. LLCs don’t have to do that. They are run moment to moment, day by day, and are a lot easier to run.
S corporations have restrictions on how many people can be members, and who can run the company. LLCs don’t have anything like that from determining the structure within. In fact, LLC members can be from other countries, have roles in other companies, and the company itself can have as many members as it wants and or needs.
Normally, if someone joins as a partner they can’t be involved in the normal day-to-day business aspects of the company; however, LLC members can be members and help run the company. There doesn’t have to be any sort of divide as there would be in a normal company.
Build Business Credit
LLCs can apply and build credit without having the member’s credit situation affect it. Its score and history exist apart from its members. This is especially good in the managing of the company because no one member can hold it back. The store is its own entity, and thus has its own credit.
Attractive to Foreign Investors
LLCs are new to the U.S. but have been in existence in other parts of the world for well over hundred years. This means that when foreign investors come, they are more than likely aware of how LLCs work and aren’t turned away from its structure. Plus, LLCs tend to not be as intimidating as larger company entities and are much less likely to scare away investors.
LLC Ownership Gives You Control
Most people who choose to be an LLC do so because they want control of their business. Adding to this is that in most states in the U.S., it’s permissible to only have one owner of an LLC, making it perfect for small-business owners. Single member LLCs are able to make their own decisions without have to get approval from investors as they would if their company was considered a partnership or corporation, and they can do so without fear of being personally accountable if problems arise. Once more people start joining as members, any future problems can be thwarted by having a user agreement between all operating parties. That user agreement can outline what happens when certain situations arise, so that if someone should choose to leave, the company can still legally operate and run as a business entity. Generally, whatever works best for all parties concerned can be put into the agreement.
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