If you own or plan to create a small business, you may want to think about forming it as a limited liability company. This organization type is well-suited for the needs of most small business owners. An LLC is especially useful for businesses with multiple owners. Below are six reasons you may want to turn your small business into an LLC.
You Don’t Pay Taxes Twice
LLCs are usually taxed as pass-through entities. This means that the owners pay taxes on profits through their personal tax returns. Although there are some drawbacks to this, there is one very important benefit: you don’t pay taxes twice. A C-corporation, on the other hand, pays corporate taxes as well as income taxes for the owners.
In most cases for small businesses, it is better to pay taxes as an LLC. However, you should consult a tax accountant for more specific guidance.
It Limits Your Liability
Perhaps the number one reason that people decide to create an LLC is right in the name: it limits liability. In a sole proprietorship, your personal assets may be on the line to cover business liabilities and vice versa. In a partnership, this can be even worse. You may be on the line for your partner’s liabilities.
Conversely, an LLC limits your liability to the investment you made in the company. This significantly limits how much trouble you can get into if things go south.
It’s More Professional
When you are trying to sell your products or services, you want your prospective customers to view your organization as being professional. An LLC is a simple way to indicate that you are to be taken seriously. This is especially important if you sell to businesses, who may want to be sure that their vendor will continue to be around for a while.
Show everyone that you mean business by forming an LLC. The simple formation process makes it ideal for this purpose.
You Can Run It However You Like
When you run an LLC, you can choose to manage it however you like. In contrast, a C-corporation has clear rules about how it must be structured. For your LLC, all you need to do it set down some rules about its management in your operating agreement.
Furthermore, you can always revise your operating agreement to change the management if you need to. Many people choose LLCs because they offer the benefits of a business entity without the formality.
You Can Distribute Profits However You Like
Similarly, you have a lot of control over how you distribute your profits. These may be defined within your operating agreement. However, you can change those rules and vote for exceptions when necessary.
For example, if one owner makes an especially large contribution one year, you may vote to increase his or her compensation through profit distribution. This flexibility makes it ideal for running a small business. You don’t have to get bogged down in regulations and excessive formality.
You Can Change Management Easily
Sometimes people want to leave small businesses and move on to new adventures. In a more formal organization type, this can be challenging. There are lots of rules about how ownership can change hands. However, in an LLC, you have a lot of control over who owns what.
Again, the flexibility of an LLC makes it a preferable entity type for many small business owners. There are fewer obstacles to running things however you want. Generally, all you need to do is pass a vote by the members to make the amendments you need.
These benefits of an LLC make it a great entity type for small businesses. Whether you are starting a new company or have an existing one organized differently, you may want to think about starting an LLC. There are many benefits and the generally outweigh the drawbacks. Don’t forget to get help with the legal filing to create your entity.