Whether you’ve been in business for years, are just starting out, or are building your side hustle, operating as a limited liability company (LLC) makes sense (and cents/dollars) for at least five reasons.
- Protect Personal Assets. An LLC is a legal entity that can own assets and make promises separate from your personal assets and obligations. Keeping your personal assets and obligations isolated from your business’s is essential because you want to prevent your business’s liability from bleeding over to your personal assets. In other words, recovery for an LLC’s debts and claims (e.g., lawsuits against the LLC) are limited to the LLC’s assets only. Keeping your personal assets personal is the #1 benefit of an LLC.
- No Entity Level Tax. Certain entities (e.g., C corporations) file tax returns and pay tax on the entity’s income and the owners pay tax on their personal income, too. Not so for an LLC. LLC owners only report profit and loss on their personal tax returns and at their personal tax rates.
- Flexibility in Management and Taxation. LLCs have lots of choices about how they’d like to be owned, taxed (e.g., as a sole proprietorship, partnership, or corporation), and managed. Formalized in an operating agreement, LLCs get to decide, for example, how decisions will be made, what happens if a member dies, and whether a member can sell its LLC interest and if so, how.
- Simple to Maintain. LLC owners must maintain basic records, keep the LLC’s assets separate from other business or personal assets, and file annual reports with the state in which the LLC was formed. But that’s about it. Maintaining an LLC, and all the legal protection it provides, is inexpensive and straightforward. Another win for LLC owners!
- Attractive to Some Investors. If you’re thinking about or looking for outside investors, setting up your business as an LLC rather than a sole proprietorship is critical. That said, if your plan to reach out to venture capitalists for funding, you may opt to form (or convert your LLC to) a corporation, instead.
Forming an LLC offers significant benefits to small businesses including liability protection, flexibility, and tax savings. Plus, forming and maintaining an LLC is straightforward and relatively inexpensive. If you want to talk about whether an LLC is the right choice for your business, let’s talk.
Stephanie, owner of Melnick & Melnick, S.C. and self-described law nerd has been practicing law for over 25 years. Stephanie loves taking a deep dive into clients’ businesses to learn what makes them tick. She also relishes a well-written (short and simple) contract and is pleased to draft and negotiate all kinds, including leases, operating agreements, and terms of service.more posts by Stephanie →