Why is LLC the Best: Everything You Need to Know
This business formation is one of the top choices for startup companies and smaller businesses because of its flexibility and ease.3 min read
Wondering why is LLC the best? This business formation is one of the top choices for startup companies and smaller businesses because of its flexibility and ease.
What is an LLC?
An LLC, or limited liability company, has become one of the top business entities for small and new companies. LLCs are more flexible than corporations, and it's easier to form an LLC. An LLC combines the limited liability benefits of corporations with pass-through taxation benefits that are exclusive to sole proprietorships and partnerships. As a result, forming an LLC creates a situation where business owners can take advantage of the best of both business formations.
After you form an LLC, the business becomes a separate legal entity that exists apart from its owners. The only exception is in taxation since the taxes of an LLC are linked to the personal taxes of its owners. An LLC owner is called a member. LLCs can have one member or more than one member, depending on the needs of the business.
When comparing LLCs to partnerships and sole proprietorships, an LLC has more advantages. However, a business must be in the right stage to be formed as an LLC. When comparing an LLC to a corporation, there are quite a few similarities. The main similarity is the limited liability protection, which limits the personal liability of the LLC's members for business debts or legal action. An LLC also has advantages over a corporation, including improved tax flexibility and fewer corporate formalities. However, the business profits of an LLC are often subject to self-employment taxes, which have high rates.
An LLC offers liability protection to all members, while a limited partnership's liability protection only extends to the limited partners.
What Types of Businesses Should Choose an LLC?
If any of the following apply, an LLC may be a good business formation option:
- Need flexibility for taxes and business management
- Need asset protection
- Don't need to raise capital for the business
Regardless of whether you have a partner in your business, operate a sole proprietor, or have multiple members, forming the company as an LLC is beneficial for a small business owner. It comes with the limited liability protection of a corporation while eliminating the formalities and complexities associated with forming this type of business.
Businesses in certain industries are restricted from operating as LLCs. Examples include:
- Insurance agencies
- Financial trust companies
In certain states, additional restrictions apply to LLC formation. For example, California statutes restrict licensed health care providers, architects, and accountants from forming LLCs. When starting a business, the owner is usually choosing between corporation and LLC for the formation. However, both of these business formations offer similar tax advantages.
Something that many people don't realize is that under tax laws, an LLC can elect for taxation as an S corporation. A C corporation is the more traditional formation, which is double taxed. Taxation occurs first on the business profits, and then on the dividends paid to shareholders. If a business plans to go public in the future, a C corporation formation is better because it has additional options to raise capital. However, this type of formation is subject to strict governance and organizational rules and laws.
When a business is taxed as an S corporation, the taxation only happens on one level. Another benefit of the S corporation is an option to reduce the payroll tax exposure of the owner or operator through distributions.
If the owner of a business doesn't plan to immediately go public, an LLC can be a good option. Forming this type of business offers advantages, such as:
- Protection of personal assets
- Maximized tax advantages
- Few formalities
- Less paperwork
One of the key advantages over other business formations is limited liability protection. Members aren't responsible for the liabilities and debts incurred by the business. The personal liability of each member is limited to the amount they invested in the company, which helps protect their personal assets that exist separately from the business.
Another benefit is pass-through taxation, which means the business income and losses are passed through the company to the members. Members then report those amounts on their personal tax returns. The business itself does not pay taxes on the income, so it isn't double taxed.
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