If you’re just starting your company, you may wonder which organizational structure is right for you. Many new business owners choose to form their business as a limited liability company (LLC), and for good reason. While other structures, such as sole proprietorships and corporations, also have their merits, there is no denying that the advantages of operating as an LLC are very appealing for a startup.
Great for Small Businesses
Maybe your business is in its early stages and your team is still small, or perhaps you are a one-man show and plan to stay that way. In any case, operating as an LLC is great for small businesses. In nearly every state, you can operate an LLC with just a single member. Without a board of directors to run all of your decisions by, that gives you the flexibility to run your business your own way. When the time comes to add an owner to your LLC, you will set up an operating agreement to make sure that each partner has designated roles within the business.
Your Personal Assets are Protected
The main benefit of operating as an LLC is that your business will be a legal entity separate from your personal assets. Just like with a corporation, owners of an LLC do not take on personal liability for an LLC’s debts or other liabilities. That means is the unexpected happens within your business, your personal home, credit, and bank accounts will not be affected. That doesn’t mean that you don’t have any personal risk as an owner of the business. Often times, LLC owners will personally guarantee business debt, such as credit cards and loans. If this is the case, then creditors can still come after you if you default on those debts. However, generally, you can rest easy knowing that your personal assets will be secure as the owner of an LLC.
LLCs have certain tax advantages over corporations. Specifically, owners of an LLC can avoid double taxation. When a traditional corporation earns profits, that income is taxed. In addition, any dividends received by shareholders are also taxed as income. LLCs however, receive pass-through deductions on their profits. This means that owners will only have to pay taxes on their businesses profits once, on their personal tax returns.
Most business entities dictate that profits are shared among owner’s based on their individual stake in the company. However, LLCs have the flexibility to decide for themselves how profits will be disbursed. If you have partners within your LLC. The rules for profit sharing may be spelled out in your operating agreement, however, they do not necessarily have to be. This could be great for small businesses where various owners are not able to dedicate the same about of time and effort into a business from one year to another. The owners within your LLC can determine whether or not certain partners should receive more of the profits than others based on their contribution to the business that year, or whatever other criteria you set.
If you have questions about starting an LLC, contact the business law professionals at Derryberry & Associates.