Five Reasons Why an LLC Is a Popular Choice for Business Owners
29 December, 2021
Starting a new business can be exciting and stressful at the same time. While you cannot wait to start earning an income, you have so many ownership options to choose from. You can either run a sole proprietorship, a general partnership, a corporation or start an LLC. Read on for five reasons why an LLC is a popular choice for business owners and why you should consider investing in one.
1. Limits personal liability
In a sole proprietorship or partnership, you and your business are often viewed as one person. This means that if your partner or employee is accused of negligence or the business incurs bad debts, your personal property and assets could be at risk, which is why you should learn how to form an LLC.
A Limited Liability Company (LLC) is viewed as a separate legal entity from the owners or partners, so it is responsible for its debts and legal liabilities. While you could lose your contribution to the entity, your personal assets such as bank accounts or homes cannot be leveraged to foot business debts.
2. Better chances of attracting investors
Having a business idea and plan is not enough. You further need capital to start and run your business effectively. If you do not have enough capital, looking for individuals or corporations to invest in your business is a safe option. However, most investors, including banks and venture capitalists, seek to reduce unnecessary risks to their investments, so they may be hesitant to invest in a partnership or sole proprietorship.
An LLC limits liability to the amount an individual invests in a company, making incorporations more attractive. With an LLC, you could also transfer some of your equity to a potential investor without difficulty encouraging them to invest in your business.
3. Prevent double taxation
One of the main reasons business owners opt to start an LLC is to avoid double taxation. In standard corporations, the business and the shareholders are taxed separately. This means that business profits are taxed at corporate levels, while shareholder's dividends and salaries are taxed the second time at individual levels.
The Internal Revenue Service (IRS) classifies limited liability companies either as sole proprietorships or partnerships depending on the number of owners. This allows limited liability companies to take advantage of the pass-through taxation. This means that LLCs do not have to pay taxes at corporate levels. Income and expenses pass through to individual personal tax returns, and you pay personal income tax on profits.
Most business entities share profits based on member contributions and percentage of ownership interest. In general partnerships, members share profits equally. However, limited liability companies allow flexibility in profit distribution based on the LLC operating agreement.
For instance, you may decide to take less profit on your proportional share if another member dedicates more hours to the daily organization's operations. Limited liability companies also allow flexibility on membership in that there is no limit on the number of business shareholders.
5. Less paperwork
While corporations offer limited liability, they must observe specific legal requirements to run effectively. Corporations should make annual reports, hold annual meetings and pay yearly fees. Members do not have to hold annual meetings or file extensive records with an LLC, and LLCs are not even legally obliged to make annual reports in some states.
A limited liability company is a perfect choice when starting a small business. It offers limited personal liability, prevents double taxation, improves chances of accessing capital, and has less paperwork. Start your LLC today to enjoy the benefits mentioned above.
« Go Back to Articles