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Editor's Note: Take a look at our featured best practice, Digital Transformation Strategy (145-slide PowerPoint presentation). Digital Transformation is being embraced by organizations across most industries, as the role of technology shifts from being a business enabler to a business driver. This has only been accelerated by the COVID-19 global pandemic. Thus, to remain competitive and outcompete in today's fast paced, [read more]
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Starting a business is never as easy as people think it’s going to be. It won’t be long before you discover just how many decisions need to be made, decisions that you had no idea you would have to make. One of these is what type of business you are going to run – not what your business is going to do, but how it will be structured.
There are several advantages to structuring your business as an LLC, let’s take a look at some of the key ones.
LLC is short for limited liability company. Most businesses are either partnerships or owned by a sole proprietor, meaning that they are legally inseparable from the individual(s) who run them. If you are at the helm of a business like this and one of your business partners, or even a normal employee in your business, is accused of wrongdoing, your own personal assets could be at risk.
An LLC works differently, limiting the exposure of your personal assets and creating an entity that is legally separate from you. This means that the LLC will be responsible for its own debts and legal obligations if your business falls into debt. Then your personal assets won’t be at risk and can’t be collected to recoup a business debt.
Corporations can be structured so that they limit the personal liability of the owners. However, unlike an LLC, a corporation has a number of legal obligations that have to be observed. For example, corporations have to hold shareholder meetings every so often, make annual reports, and are required to pay fees to the treasury. Additionally, the recordkeeping demands placed on a corporation are significantly more stringent than they are for an LLC.
With an LLC, you don’t have to worry about meeting these obligations; you will have much more time to focus on yourself and your business. Depending on the state you register your LLC in, you might not even need to file annual business reports. You can find all the information about setting up an LLC in your state online. For example, check this link to find out what’s involved in setting up an LLC in Georgia state.
With regards to tax, an LLC offers you the best of all worlds. The first thing to know is that an LLC doesn’t have a federal tax classification. Instead, they are able to “adopt” the tax status of an S or C type corporation, a sole proprietorship, or a partnership. For their part, the IRS will automatically classify an LLC as either a sole proprietorship or a partnership depending on whether it is owned by one person or multiple people.
Because of this, an LLC is always able to engage in “pass-through taxation”. Essentially, this means that the LLC doesn’t pay any corporate taxes. Instead, the income and expenses of the LLC are recorded in the owners’ personal tax returns and they personally pay any tax incurred.
LLCs have much more flexibility in terms of who can own them. Compare them to an S type corporation, which is also able to take advantage of pass-through taxation. An S type corporation is severely restricted in terms of who can own it. For example, an S type corporation can’t have more than 100 shareholders, can’t have any shareholders that are corporations, and cannot have any shareholders based overseas.
LLCs are not required to use a specific management structure in the way that corporations are. A corporation will have a board of directors who are in charge of formulating corporate policy, as well as managers, known as officers, who are responsible for the day to day running of the business. Shareholders in a corporation are required to meet every year to conduct business and elect their directors.
By contrast, an LLC is not bound by these same requirements and the owners of an LLC can choose how they run the business and how they make decisions.
LLCs are dynamic and versatile, and much simpler than other types of corporate structure. If you want more freedom to decide how your business is run and managed, an LLC is a good way to go.
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