If you are interested in starting your own business, you will need to figure out which type of business entity you want to set up. One of the most powerful business entities is the LLC, which has many advantages and benefits. An LLC can protect your personal assets, reduce your taxes and save you time. In this article from JD Supra, the LLC experts at LegalZoom explain why a limited liability company ownership structure may be the right choice for your small business.
The Limited Liability Company, or LLC, is a relatively new type of business structure that combines the best features of the corporation with those of the sole proprietorship or partnership. The primary advantage of an LLC is that it affords its members the personal liability protection of a corporation, but without all of the corporate formalities.
LLCs also have the flexibility to be taxed as a corporation or as a “pass-through entity,” similar to a sole proprietorship or general partnership (for more on pass-through entities, see the Tax Flexibility and Savings section below).
Liability and Asset Protection
As a sole proprietor, you and your business are legally inseparable. In other words, your company’s debts are legally your debts. And a lawsuit brought against your business is also a lawsuit brought against you. This means your home, car, savings and investments could all be taken from you should your business get sued or go into debt. In a general partnership, the risk is even greater. This is because each partner can independently make decisions that impact the partnership as a whole. If one partner makes a bad decision, both partners are on the hook for the entire amount of any damages.
By contrast, an LLC is viewed as a legally distinct entity. If your business hits hard times, you are not personally held responsible for any debts or court judgments. Moreover, if your business goes under, you won’t have to carry your business debts over to your next venture. Whatever your line of business, protecting yourself against personal liability can help you avoid a
potentially disastrous situation.
NOTE: While LLCs can protect you from personal liability, this protection is not absolute. You and other LLC members may be liable for the debts of an LLC if:
- You personally guarantee a debt.
- You intermingle personal funds with LLC funds.
- Your LLC has minimal capitalization or minimal insurance.
- Your LLC fails to pay state taxes or otherwise violates state law.
Tax Savings & Flexibility
When it comes to taxes, LLCs offer the most flexibility. LLCs have the option of being taxed as a “pass-through” entity (like a partnership or sole proprietorship) or as a regular C-corporation. By default, your LLC is automatically recognized by the IRS as a pass-through tax entity. In other words, it “passes” income, deductions, losses, gains and tax credits directly through to you. These amounts are reported on your individual returns, and you pay taxes at your individual tax rate. In addition, if you actively participate in running your LLC, you are allowed to deduct operating losses against your regular income.
LLC members are not required to pay unemployment insurance taxes on their own salary. However, members must pay self-employment taxes on any salary they receive and on any company profits allocated to them.
Ease of Transfer
Ownership interests in an LLC may generally be sold to third parties without disrupting the continued operation of the business. On the other hand, selling interests in a sole proprietorship or general partnership requires much more time and effort. An owner must individually transfer assets, business licenses, bank accounts, permits and other legal documentation.
If you have plans to one day pass your family business down to the next generation, converting your sole proprietorship to an LLC can help smooth the transition. Legally speaking, as a sole proprietor your business is inseparable from you, which means when you die, your business dies along with you. Without converting your business to another business structure or implementing some very sophisticated estate planning strategies, your heirs will have a very difficult time inheriting your life’s work.
An LLC has no ownership restrictions
As an LLC, your business can retain any number of members. By comparison, S-corporations cannot have more than 100 stockholders, and each must be a resident or citizen of the United States. None of these restrictions apply to an LLC.
An LLC provides living trust flexibility
As a member of an LLC, you are free to place your membership interests into a living trust for your beneficiaries. By contrast, placing shares of an S-corporation into a living trust is extremely difficult.
An LLC makes it easier to raise capital
As an LLC, you have more options available to raise capital. You can admit new members by selling membership interests. You can even create new classes of membership interests with different voting or profit characteristics.
An LLC offers greater credibility
As an LLC, your business will enjoy legitimacy and greater credibility when dealing with other companies, banks and potential partners.
The original article can be found at JD Supra.
If you would like to learn more about forming an LLC for your business, visit LegalZoom's website at http://www.legalzoom.com/.