Limited Liability Companies (also known as LLCs) are pretty popular. In recent years, more and more people have been embracing LLCs as the best way to structure a company. Inc. notes that they could be a useful business structure for startups. Aside from the usefulness as a solid startup structure, it's also useful as an alternative to a sole proprietorship. In some jurisdictions, businesses can file LLCs with only one member at their head. These single-member LLCs have the same benefits as companies with full boards, with very few drawbacks.
LLCs have become popular primarily because of the benefits they offer to the average businessman. A booming economy has seen more and more people opt to open new businesses. Yet having a business without legal protections is a potential disaster waiting to happen. Unfortunately, many myths surround LLCs simply because they can be a complex subject to figure out. The Balance SMB mentions several myths that have surrounded the formation of LLCs. LLCs don't have to be complicated, but they work better for some professions than others.
Who Should Start an LLC?
LLCs are flexible business structures, and this flexibility makes them useful in many industries. Some sole proprietors, including owners of small retail businesses, can benefit significantly from turning their business into an LLC. Aside from small retailers, mobile companies and those that operate without a fixed location can also benefit from an LLC filing. These may include delivery persons or those that do pop-up shops. Professionals can also form an LLC to legitimize their business and start building a brand together with a logo. Professional LLCs or PLLCs sometimes have different legal requirements, including licensing from a state board. But why would a professional or retailer want to set up an LLC in the first place? It turns out there are some excellent benefits to operating as an LLC.
Advantages of an LLC
LLCs provide some crucial benefits to their owners that make the business structure a far more attractive way to operate a business. Among the benefits that draw business owners over to this type of structure are:
- Limited Personal Liability: When operating a sole proprietorship, both your assets and your business's assets are considered the same. In the event that you are involved in litigation, your assets may become part of the settlement, even though your business was the one that was sued. LLCs avoid this by separating the business entity from the person who owns it. In the case of a legal matter, the persons involved would only get the business's assets as part of the settlement. All your personal assets would be protected from payments, keeping your wealth separate from your business dealings.
- Tax Advantages: The IRS sees LLCs as "pass-through" entities, which means that taxes aren't collected from the business itself. Instead, the owners of the business pay self-employment taxes, and the IRS collects taxes on their earnings. There is an exception when it comes to taxation for LLCs, however. LLCs are required to register for an EIN to pay excise taxes and other employment-based taxes for workers. In any case, the taxes that a member of an LLC pays would be far less than if they were to register their company as a corporation. In some locales, state taxes on LLCs are non-existent.
- Privacy Protection: LLCs can be filed either publicly or privately. In a public filing, the owner's name and address are openly visible as a matter of public record. If someone is reporting on the company, they can quickly and easily contact the owners for a statement through this listing. Private filings keep the owner's name and address secret. It would require a lot more effort for someone to disturb you with a private filing, but that's also why private filings tend to cost a bit more.
- Custom Profit Distribution: If you have an LLC with members owning different proportions of the business, the profit-sharing doesn't need to go along the same lines as the ownership. In some cases, an LLC's agreement can determine that certain members get paid a larger share of the profits than others because of their contribution to the business. One of the main reasons companies look at this structure is that it adds incentives to investors.
- Timed Dissolution: When LLCs were initially introduced, they were not built to last forever, like corporations. Some LLCs include a dissolution date in their articles of incorporation. If you're looking for a business with a timed date of dissolution, an LLC is a perfect option. It allows the company to perform its function and then dissolve when it's no longer needed, keeping administration simple.
Disadvantages of LLC Registration
As with everything, LLCs also have some significant disadvantages that potential owners may need to consider carefully. LLCs usually cost more to implement than general partnerships or sole proprietorships. It also may take a considerable amount of time for the owners to get all the documentation sorted out and filed. Additionally, an LLC is much harder to transfer ownership, making it less than ideal as something that you'd sell off to someone else.
Business Lawyers Can Help
Selecting a business lawyer to act as a registered agent or help you to file your articles of incorporation might be a step some owners should consider. Lawyers have gone through so many of these filings that it's become a straightforward matter for them. Most of the documents are almost all filled out already, leaving you to head in to sign the required paperwork. It saves time by letting the lawyer handle the administrative aspect of the business filing. Their insight into filing processes is secondary to their knowledge of the system, however.
Suppose you're filing an LLC in a locale where your business has no physical presence. In that case, you can have the lawyer act as a registered agent. in this case, they may collect any correspondence on behalf of the business and forward it to the owner. For some companies, incorporating in a locale that doesn't have state-level taxes can provide them with a more significant bottom line. Consulting with a business lawyer can also help an owner determine if the LLC is a good structure for their enterprise or if another format may be more suitable to their business.