Starting a new small business involves a lot of preparation. You need funds, space, and equipment to start your operations. Aside from these immediate needs, you also need to comply with local and national requirements to ensure that your business operates legally.
Image source: Unsplash
One of these legal requirements is choosing a business structure that determines your company’s day-to-day operations, such as management, taxation, profit-sharing, and legal recognition. Many small business owners prefer the arrangement brought on by a limited liability company (LLC).
What is an LLC?
It is a business structure that allows business owners to enjoy limited personal liability without the sky-high tax rates of a corporation. You could easily form one in any state if you have a registered agent and comply with their requirements.
An LLC can have multiple members, as many as necessary. Each member can be an individual, an organization, or another business entity coming together and performing responsibilities stipulated in the LLC’s operating agreement.
Why Form an LLC?
Delaware is one of the most well-known states for forming LLCs. It recorded 180,376 total LLCs in 2020, which is 72 percent of the business entities in the entire state. LLCs are a popular choice among many companies due to their benefits, and these include the following:
Limited Personal Liability
LLCs provide the best protection from personal liability for small businesses compared to sole proprietorships or partnerships. This means that creditors won’t be able to go after each LLC member’s wealth or assets during unfortunate circumstances.
For partnerships and sole proprietorships, the company and the owners are the same entity and share their finances. While these arrangements could be convenient, especially in a business’ early stages, they could jeopardize your personal finances when the venture doesn’t succeed as planned.
As an LLC is a legal entity separate from your personal assets, your business debts are kept separate from your own finances. This gives you a legal buffer should your LLC face financial difficulties.
Easy Startup and Maintenance
Compared to corporations that offer limited personal liability, LLCs are a lot easier to establish and maintain.
LLCs need only present their registered agent, operating agreement, articles of organization, and other essential business requirements to start their operations. Aside from an annual renewal of their registered agent, LLCs could exist in perpetuity.
On the other hand, corporations usually need to hold annual shareholder meetings and submit regular reports to the state. These arrangements wouldn’t be ideal for small businesses.
Management and Ownership Flexibility
LLC members have total control over the kind of structure they wish to have in the company. Unlike corporations that need to maintain a board of directors, LLCs could opt for less traditional arrangements.
Members could oversee business operations themselves or hire outside experts to help them run things. Either way, they have complete control over the leadership structures they wish to implement in their company.
Manageable Taxation
By default, LLCs are pass-through entities. Its profits would go directly to its members, and each would only need to pay personal income tax.
Unlike corporations, LLC profits do not get taxed at a corporate level. This is a significant advantage for small businesses, as corporate taxes often run high. Some traditional corporations even experience double taxation, where shareholders get taxed on corporate and personal levels.
Profit-Sharing Flexibility
Most business entities base profit distribution on each person’s monetary contribution to the capital or the number of shares one may have. LLCs have more flexibility in this decision. LLC members could establish their own specific profit-sharing policies in their operating agreement.
For example, two members may have equal financial stakes in the business, with Person A being more involved in the business’ daily operations than Person B. This arrangement can lead to both members deciding that Person A should have a larger share of the profits due to their labor contributions to the LLC.
The Best of Both Worlds
An LLC provides the kind of flexibility that makes it one of the most preferred business entities in the US. Aside from providing the liability protection of a corporation, it has the tax benefits of a partnership or sole proprietorship.
Many of its proponents would say, “You get the best of both worlds.” It is a great starting point for many small businesses looking to expand and grow.