A Limited Liability Company, or LLC, is a type of business that protects the owners and their assets. New business statistics from the United States Census Bureau show that in August 2021 alone, more than 427,842 new business applications were filed in the US. Many entrepreneurs start a new LLC to grasp its benefits, which the Really Useful Information Company (TRUiC) expands on. This article will explore why US entrepreneurs prefer starting an LLC out of all the business formation options.
What is an LLC?
An LLC is a business structure, created in the United States, that acts to protect business owners. The protection acts to protect the owners from being personally liable for their company’s debts and/or other liabilities. An LLC is a hybrid entity and combines the benefits of a partnership and sole proprietorship structures. LLCs are able to be owned by one person, but also by multiple people who are known as LLC members. Single-member LLCs and multi-member LLCs are pass-through entities. This means that the profits and losses from the LLC are taxed as personal income by the owner/owners. LLCs also have the option of choosing to be taxed as a C corporation or an S corporation.
Benefits of LLCs
LLCs offer a multitude of benefits. To understand why US entrepreneurs choose this business type, we have compiled a list of reasons:
- LLCs avoid double taxation
Double taxation often happens when an entrepreneur chooses a C-Corp business structure. This results in the business and the owner both being taxed. LLCs prevent this as the business structure is taxed like a sole proprietorship. This benefit is extremely useful for startups who have a limited budget. If businesses would want to form a corporation in the future, they could transform into a corporation after originally having formed an LLC.
- LLCs provide professionality
Business incorporation provides a professional identity for the business. LLCs provide credibility with customers and suppliers as the name provides legitimacy, authority, and permanence. LLCs also assists in the long-term, as it is able to take part in marketing activities which would assist in establishing the brand in consumer consciousness.
- The LLC location can be chosen
It would make more sense to form an LLC in the state of business, simply for taxation purposes. But entrepreneurs are able to form an LLC outside the state of business. This is often done to avoid paying the taxes of the specific state. For example, Delaware is an attractive state for LLCs because it has low costs.
- LLC owners can easily make changes
LLC does not require extensive maintenance once formed, and it is simple to add new partners. It is also simple to sell interest in the entity to someone else. LLCs are much more relaxed than C-Corp business structures, which all require minutes for making board decisions. Additionally, LLCs are known for having fewer restrictions on many administrative items when being compared to other business structures available.
- Asset protection
Entrepreneurs may choose to form an LLC in order to protect their personal assets from lawsuits against the business. Despite this, many LLC owners choose to convert their LLC into an S-Corp or C-Corp after it has expanded and grown. This is because LLCs, even though they have a range of benefits, are best suited for businesses in their beginning stages. Once they have grown, LLCs become limited regarding acquisitions and mergers.
- Registration is simple
LLC formation is simple and fast, and does not require the use of an attorney. Once the LLC has been registered with the secretary of state, entrepreneurs can get an Employer ID Number (EIN) from the IRS, and business bank accounts.
- LLCs can change profit distributions
LLCs allow its profits to be paid out disproportionately to the actual ownership percentages. This is useful when LLC owners would like to provide an incentive for investors. For example, if an investor contributes all the capital for the LLC, it could be arranged that the investor receives 50% of the business. This benefit would also allow the profit distributions to return to normal once the investor had received his investment back.
The Bottom Line
Given the many benefits of an LLC, providing flexibility and being beneficial from a tax standpoint, starting an LLC as a startup may be a smart step towards business success. Although this business structure may be tempting, entrepreneurs need to first consider and investigate their long and short term goals. This would assist them in determining whether an LLC is the business structure for them.