LLC stands for “Limited Liability Company.” With a Limited Liability Company, you are in control of your own business. You can define your company, which provides you with a lot of flexibility. For example, you have the benefit of keeping your company’s receipts. You also benefit from keeping other business documents such as invoices and bank statements.
Your LLC can also be a tax-advantaged entity. You can deduct your business expenses from your taxes. This allows you to keep more profit returns instead of paying taxes. You can then sell your companies without tax consequences when done with your business.
The following article will discuss the reasons for creating an LLC.
1. Limited Liability
A limited liability company is one of the most popular entities used by small businesses. The most important benefit of creating an LLC is limiting your financial responsibility. Assets within the company are separated from your investments. You only have to pay for what happens within the LLC, not outside of it.
The IRS does not allow you to limit your liability in this way when you’re operating a sole proprietorship. It also limits you if you are running a general partnership.
An LLC can adapt to changes within the business. You can change how the owners are designated. For instance, how many owners there are, or even how you divide the profits. If you decide to sell your business in the future, you have more options when running an LLC. You can sell your interests partially or as total interest. Your LLC also has more flexibility for debt and equity financing options.
3. Audit Privilege
When you run an LLC, you can keep all the financial records. For example, you can keep your sales, accounts payable, and income statements. This is different from a regular business. With a typical company, the IRS will have access to those records. The access can lead to dire consequences for the future. For example, it may be easier for your clients to argue that you’ve cheated them with inflated sales records. The IRS can also enter your business and place a lien over your accounts receivable.
4. Transparent Business Operation
An LLC is much more transparent and open than a corporation. You will require to file your personal tax partnership information with the IRS. The IRS also requires you to file your company’s annual report with them for taxation purposes. This provides transparency into your business operation. It also allows the IRS to audit your company for errors easily.
5. Ease of Starting an LLC
Finding free forms and resources to start a corporation is difficult. However, that’s not the case when you want to start an LLC. You can easily find free forms and templates for creating an LLC from many sources. For instance, you can get forms from your state government. Also, some online legal technology companies can provide you with the resources you need to start an LLC. A good example is LegalZone. The website offers you the proper forms and resources to start a LegalZone LLC.
6. No Restricted Ownership of an LLC
Many business owners hire their spouses and children to work in their businesses. An LLC allows you to have multiple owners. It could be your spouse and yourself. Or you could potentially have a silent partner that doesn’t involve themselves in the daily operations. It is helpful if you want your business to grow. You can also choose to let your employees invest in the industry. Investing in an LLC allows you to enjoy the benefits of the business tax advantages.
7. Value Creation
When you’re running your own business, it’s critical to understand how the company works. And how you could improve it. For example, improving customer service or finding new and innovative ways to promote your products. Running a traditional corporation usually prohibits taking this kind of entrepreneurial action. However, an LLC affords you the space to create and explore new ways of creating value for your company.
8. You Can Raise Seed Money from Friends and Family
Individuals usually form Traditional LLCs as corporations. With traditional LLCs, you have to choose between a stock or a bond option. You might have to select the lowest-priced options for your company’s actual income/losses. This may be high than the other options. You can either raise some money by issuing common stock or debt or convertible debentures. With an LLC, you don’t have to make such a choice because they are both possible in an LLC.
Moreover, you can raise seed money from your friends and family. This is possible because an LLC offers flexibility in the equity or debt options. It allows an investor to choose either to invest in debt or equity.
9. The Paperwork is Lighter
In a traditional LLC, you need to prepare for the following standards: Articles of organization, annual reports, and minutes of stockholder meetings. These documents require much time to prepare and register with the state’s official registry.
An LLC does not require these types of documents. You don’t have to prepare for annual reports, stockholder meetings minutes, or organization articles. The LLC can be a complete package in itself. Also, provided the states allow the limited liability company concept, you don’t need to have a separate document for the LLC.
10. You Can Plan your Estate
With an LLC, you can leave your family a more significant amount of money than if you’re not running a business. It is because LLCs are tax-advantaged businesses. The remaining members can carry on the company if you pass away with an LLC. That way, the company can continue to operate. And it protects your heirs from paying unnecessary taxes.
The Bottom Line
An LLC offers many advantages, especially for small business owners. It’s a more flexible entity with many financial and tax benefits. While some business owners run their company through a corporation, this is not the best choice. This is because of the restrictions that come with corporate ownership. If you’re planning on leaving your company in the future, then you want to do so in a manner that has few or no tax implications.