Forming an LLC (Limited Liability Company) is an important step in starting your business. There are some advantages as well as disadvantages involved in doing so and it is important that you, the business owner, will understand them, if not to the greatest detail then at least briefly. LLC combines some elements of a corporation and of a partnership / sole proprietorship and although it is not considered a corporation it does provide some of the same protection a corporation offers. It can make different procedures shorter and easier, such as applying for a merchant account or transferring ownership. Below are some of the benefits that the LLC structure is offering. Limited Liability As a sole proprietor, you and your business are inseparable by law. In other words, any company debts you have are legally your personal debts. Same thing applies to a law suit, in a case in which there is a lawsuit against your business and you are a sole proprietor, the lawsuit brought against you. In a partnership the risk becomes greater as each partner can independently make decisions that will affect the other partner. On the other hand, LLC is a separate entity by law. In case your business reaches some tough times, you are not personally liable or held responsible for any debts the company accumulates or court judgments made against your company. Tax Flexibility An LLC owner can choose how it will be taxed; as a sole proprietorship, partnership, S corporation or corporation. By default, your LLC is recognized by the IRS as a “pass-through” entity, such as a partnership or sole proprietorship. What it means is that it passes income, expenses, losses, gains and tax (expense or benefit) directly at you. These amounts are reported on an individual tax return, and typically, you pay taxes at your individual tax rate. Members of an LLC are not required by law to pay unemployment taxes on their own salary. But, members must pay self-employment taxes on any wages they receive and on any company profits distributed to them. Increase Credibility By adding “LLC” to your business name you will project legitimacy to your customers and build confidence and trust in your brand quicker. LLC indicates that the company is officially registered at a certain State, unlike sole proprietorship that may not be registered at all. It will make it easier to acquire capital as well as to apply for a merchant account in case your business will want to accept credit cards as a form of payment. Credit card processing companies tend to trust LLC’s more than sole proprietors. If you are a new business that has no history it will be easier for you to get approval for a merchant account because it means that you are serious about your business and you are not in it for a short term. Build Credit An LLC, as a separate entity, can establish a new and distinct credit that is separate from its owner’s personal credit profile. Ease of Transfer In a case in which you would like to sell your business it will be a much easier procedure to transfer assets, business licenses, bank accounts, permits and other documentation onto someone else as everything will be under an LLC. In comparison, if you are a sole proprietorship you will have to transfer each of the components to a new name separately, which will take more time and sometimes would be complicated. Conclusion In conclusion, an LLC offers a variety of benefits; from limited liability to tax flexibility but it is not to say that an LLC will be good for you. Before becoming an LLC check all perspectives of the advantages vs. the disadvantages of an LLC and see what would benefit you and your business more; either to stay as a sole proprietor, become an LLC or incorporate yourself. You can find more information about LLC at the IRS website. PermalinkPosted: March 8, 2013
