When starting a business, you are required to choose a legal business entity. There are a couple to choose from, but the most common is a limited liability company, also referred to as an LLC.
Most small to medium businesses choose the LLC over other business entities such as corporations, partnerships, sole proprietorships, and S corporations. This is because of the many benefits that they stand to enjoy.
So, why are LLCs very popular, and why do most businesses choose this type of business entity?Â
In considering the financial aspects, entrepreneurs appreciate the transparency and ease of compliance associated with an LLC yearly fee for maintaining an LLC is a reasonable investment considering the protection and advantages it affords. It’s a worthwhile investment for businesses aiming for sustainable success, as it provides limited liability, simplified management, and tax flexibility.
Here are a few simple, smart reasons for you to establish an LLC;
1. Protection Against Personal Liability
One of the main purposes of an LLC is to protect the business owners against personal liability. Almost every business comes with its own risks, and it makes sense for business owners to ensure they are protected against personal liability.
But what does protection against personal liability mean? Well, it means that the business owners cannot lose their personal assets in a situation where the LLC is sued or goes into debt. Other business legal structures lack this kind of protection.
However, business owners should be careful since they can lose this protection. This can happen in case they are involved in fraud or fail to separate their business accounts from their personal accounts. Ensure that you have opened a business account for your LLC.
2. Helps Shield Intellectual Property
Intellectual property can be defined as a type of property such as creations by the human intellect. The most common ones include trade secrets, trademarks, copyrights, and patents. You can use an LLC to protect your intellectual property.
Most business owners would not like to have their intellectual property operating in the open. This is what an operating company is supposed to do. Instead, they start another LLC and let it protect these types of properties.
They can then use the second LLC to lease intellectual property to the operating company. However, they should ensure they have transferred money to the second LLC and signed the required paperwork to make everything legal.
3. LLCs Offer More Tax Flexibility
When starting an LLC, every business owner hopes that their business will grow with time. When this happens, they start getting more flexibility when it comes to taxes. LLCs come with a tax structure known as pass-through taxation.
Pass-through taxation means that the losses or profits a business makes are not taxed by anyone. Instead, they are passed to the members of the LLC and taxed as their own tax return and the members’ personal rates.
This makes it easy for the members to avoid double taxation. This scenario is not available to other business entities such as corporations. Such entities pay their own taxes and the business owners are taxed on their dividends. You can also choose to have your LLC taxed as an S Corp or C Corp depending on the situation in your business.
Suggested Read: How To Choose The Ideal Legal Business Structure For Your Tech Startup?
4. Easy to Start and Maintain
LLCs are among the easiest to start and maintain business structures. In addition, they come with more benefits compared to other types of business structures. This is one of the reasons they are common among small businesses.
The highest cost when starting an LLC is the filing cost. Depending on your state, you might have to part with between $0 to $500. Unlike other business structures, you do not need a lawyer to form an LLC. This is what makes start-up costs for small businesses affordable.
In addition, you get less paperwork when it comes to compliance with LLCs. Less paperwork means you are saving money when it comes to filing fees. Even though some people might argue that sole proprietorships are cheap to start, they might devastate you because they lack protection against personal liability.
5. They Are Simple
Apart from being easy to start and maintain as discussed above, LLCs are also simple. This gives the business owners enough time to concentrate on core business functions instead of focusing on the administrative functions of business entities.
In addition, business owners can form an LLC without help from third parties. However, this does not mean that getting help is wrong. If you feel that you are not comfortable forming an LLC on your own, you can always seek professional help.
Less regulation and paperwork compared to other business structures make LLCs simple. For instance, you do not have to keep minutes for your meetings or have shareholder meetings. You will also not need a board of directors. You do not have an idea how much money you can save here.
6. Helps Entrepreneurs Segregate Assets
Segregating assets is one of the most important things for every business. If you can segregate assets into different LLCs, you can keep them safe and away from the reach of creditors. They cannot even be touched in a situation where you are sued.
Most people assume that starting an LLC or corporation means that their assets are automatically protected. This is, unfortunately, not always true. Your biggest asset is your business and you need to protect it at all costs.
To segregate assets, entrepreneurs do not keep them in the operating company. They, instead, lease assets back to the operating company. They still own the LLC companies that own the assets.
There are many simple and smart reasons to establish an LLC. As you can see above, this is the best business structure to start today.
Also Read: 6 Important Things to Get in Place As Soon As Your Small Business Begins to Grow
