Taking care of the administrative side of a small business can be a time-consuming and complex task. Filing taxes correctly and creating a legal business entity can have a significant impact on the long-term success of your endeavor. No matter what size your company is, it's essential to understand how its legal status can affect you personally. Depending on your state laws, you may be able to choose from several legal structures for your business, such as a corporation, partnership, and sole proprietorship. Each one of these entities has unique challenges and advantages. Another option is making your business into a limited liability corporation. There are several potential benefits an LLC structure can offer.
1. Reduced Personal Liability
One of the most important benefits that you get when you create an llc is listed right in the name: limited liability. When you file as an LLC, you drastically reduce the personal liability you have for your business. If you currently operate as a sole proprietor, you can be held personally responsible for the financial obligations of your business. This can be problematic if your business accrues significant debts or undergoes a lawsuit. However, when you make your business into an LLC, it separates the business liability from your personal liability. Your business obligations are covered by business assets, rather than your personal finances. In the event of a lawsuit or debt collection action against your business, your personal assets are protected.
2. Additional Tax Options
Each type of legal business entity, such as a corporation or partnership, has unique tax obligations. These may vary according to both state and federal laws. One of the unique advantages of an LLC is that you can choose one of several ways to pay taxes for your business. For example, if you are the only one who works at your company, you may still file taxes as a sole proprietor after creating an LLC. If you have more than one person as part of your LLC, each owner can include the LLC's profits in his or her personal tax return, which eliminates the need for the LLC itself to pay corporate taxes.
3. Few Recordkeeping Requirements
Corporations have some specific advantages, including investment capital from shareholders, but if your business is fairly small, you may get more value out of filing as an LLC. It can be difficult to meet certain management requirements, such as scheduling shareholder meetings and developing detailed annual reports, if you don't have a lot of staff members. If your business consists of you alone, or you have only a few partners or employees, an LLC structure can eliminate the need for you to follow the specific recordkeeping procedures required for corporations.
4. Management and Staff Flexibility
Another aspect of a corporation that may not work as well for small businesses is the required management structure. Generally, a corporation must have a board of directors that needs to meet often enough to make decisions. There may also be the need to schedule shareholder meetings at a certain frequency. With an LLC, you don't have to elect directors or have any sort of formal structure to make business decisions. You can run your LLC by yourself or meet informally with your partners to make decisions when necessary.
5. Profit Distribution Freedom
Another important aspect of an LLC involves distributing profits. When you set up your LLC, you can decide how you want to divide the business' profits among the owners. For example, if you have a "silent partner," you may agree with him or her on a profit-distribution model that pays you slightly more for your daily involvement with the business. Because an LLC doesn't have shareholders, you don't have to worry about dividing your profits among them. You may also be able to change the way you distribute profits when necessary without having to convene an official board meeting or create shareholder records.
When you decide to create a legal entity for your business, you may have several options to choose from. An LLC structure offers several unique advantages for small businesses, including flexibility in taxation, profit distribution, and management.