Why LLC Is Good: Everything You Need to Know
An LLC is the least complex structure, is easily converted from another type of business structure, and has tax benefits.3 min read
2. Limited Liability Companies and Taxes
The question of why LLC is good has multiple answers. An LLC is the least complex structure, is easily converted from another type of business structure, and has tax benefits.
The "LLC" part of a business's name stands for limited liability company. An LLC is owned by its members, which can be a single individual or multiple parties. It is formed by filing articles of organization in the state where the business is located. An LLC is easier to operate since it requires less work than a corporation. This is because shareholder meetings and corporate minutes are not required.
Benefits of Forming a Limited Liability Company
Customizing Small Businesses
An LLC is an adaptable structure for small businesses due to its flexibility. Whether it is just you or 100 investors running the business, you can create your own operating agreement with rules that suit your business needs.
Protecting Real Estate Assets
An LLC offers dual liability protection against lawsuits. This means if you were involved in rear-ending a vehicle, for example, a lawsuit will not include your investment properties as long as they are part of an LLC.
Raising Seed Capital
As the business entity of choice, with an LLC it is easier to raise seed funding through angel capital investors. Venture capitalists generally invest in larger corporations instead of smaller limited liability companies.
LLCs have advantages in terms of when you do your estate planning due to asset protection. They also offer protection from creditors and protection from the cost of probate lawyers and court fees.
An LLC is an ideal business structure for short-term projects. With an LLC, a specified dissolution date and the number of years the LLC is to remain in existence is stated within the articles of incorporation.
Minimizing Tax Burdens
Limited liability companies ease the burden of taxation due to the default partnership tax process. This means the losses that the business incurs are passed on to the members, who in turn use the losses as deductions for other income on their personal tax returns.
LLCs are not hindered by strict formalities. With an LLC, you have options such as:
- Members can utilize informal decision-making processes instead of dealing with a board of directors.
- Members can personally manage the operations of the business or hire outside help.
- Access to broader freedom when it comes to dividing profits and setting up member's voting rights.
Visual recognition is another advantage of running an LLC. The designation can make your business appear to be more established.
Because an LLC keeps business and personal assets separate, investors are more likely to invest. When they aren't kept separate, investors are less likely to provide capital.
When a member of an LLC retires or dies, there is no legally binding process that closes the business. The LLC will continue to operate.
Limited Liability Companies and Taxes
The IRS does not have a specific tax category for a limited liability company. An LLC with one owner (member) is taxed as a sole proprietorship. LLCs with more than one are taxed as partnerships.
As noted, the LLC does not pay taxes directly. The net income is taxed on the owner(s) personal tax return. This is referred to as "pass-through taxation." Filing as a sole proprietorship uses Schedule C. Partnerships use Form 1065 and Schedule K-1.
- Tax rates: The tax rate used for a limited liability company is based on the total income of the owner. In some instances where the level of net income is higher, the LLC may have a lower rate than a corporation.
- Double taxation: An advantage of an LLC over a corporation is that corporate owners are susceptible to double taxation whereas LLC owners are not.
- Franchise taxes: Some states require an LLC to pay franchise taxes.
- All profits are taxable: Members of an LLC must pay taxes on their distributive share of the company's profits even if there has been no distribution of those profits.
- Property tax exemption: Some states do not exempt LLCs from property tax.
- Self-employment taxes: Owners of a limited liability company must pay self-employment taxes (Social Security/Medicare).
If you need help understanding the advantages of an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.