Tens of millions of lawsuits get filed in the United States every year. Many of these lawsuits are levied at businesses that would be liable for millions of dollars if they lost in court.
Those harrowing truths, among other things, is why so many people opt to form an LLC when they start their small business.
For the uninitiated, an LLC is a Limited Liability Company. This status affords companies special benefits they don’t receive as a sole-proprietor, a corporation, or other means of classification.
If you’re a little bit lost as to what the benefits of an LLC are and that lack of clarity has held you back from organizing under this structure, you’re not alone and our team has you covered.
Keep reading to learn the common benefits an LLC can bring to your operation today!
1. Limited Financial Responsibility
When you open your small business’ doors, you’re automatically considered a sole-proprietor. Being a sole-proprietor is great in that your tax obligations will feel very similar to how you’d be taxed as an individual with a few notable exceptions.
Unfortunately, sole-proprietors are also exposed to serious financial hardship when sued.
sole-proprietors are their business. That means a lawsuit that aims to take thousands of dollars from your company is a lawsuit that aims to take thousands of dollars from you personally.
LLCs give you legal separation from your business which, in most cases, will only allow lawsuits to pull money from your business accounts without touching your personal accounts.
2. Lower Odds of Being Held Criminally Liable
Beyond money issues when it comes to lawsuits, lawsuits filed by private or public entities oftentimes carry serious legal implications. Implications that could land a person in prison.
While you can be held criminally liable for actions you take while running your business, under an LLC, you may be able to operate from a more defensible position that could help you avoid being arrested in certain corporate criminal proceedings.
3. Dodging Social Legislation
Corporations are a separate form of business classification that offers a lot of the liability protections that LLCs enjoy. They’re more prone to being affected by state and federally mandated social legislation though.
For example, corporations need to have a board of directors. When laws pass at a federal or state level that might mandate diversity in corporate boardrooms, that could affect you depending on your classification.
LLCs are rarely if ever targeted by socially-focused rules which means as an LLC holder, you’ll have more autonomy in how you run.
4. Pass-Through Taxation
If you love that as a sole-proprietor, the money your business makes passes straight through to your personal income, you’re going to love this item on our benefits of an LLC list!
Like sole-proprietorships, LLCs enjoy “pass-through taxation”. Put simply, it means that money your business makes is not taxed at the corporate level. The money flows straight through your company, to your personal accounts and is taxed as income tax.
5. No Ownership Caps
Business classifications like S-Corps have ownership caps that limit how many people can be partners in a company. Granted, these ownership caps are high (100 shareholders at last count).
LLCs are looser in that if you want to have well over 100 people invested in your business, you can do so without legal ramifications.
This creates more opportunities for flexibility when it comes to raising money.
6. Simple Formation
One of the main reasons why people forgo the benefits of an LLC is because they don’t want to go through the hassle of forming one.
Yes, forming an LLC requires you to fill out paperwork and yes, formation does cost money. Paperwork is minimal though, can be managed through several online tools, and the cost to file is in the hundreds of dollars.
When you consider the relative ease and low-cost of LLC filing and stack that against the protections the classification offers, you’ll almost certainly find it to be an outstanding deal.
7. Profit Distribution Flexibility
As your business grows, more money is going to flow through it. That cash flow and its resulting profit would need to be split up evenly between shareholders if your company was classified as a corporation.
As an LLC, you can split up money however you and your partners see fit. This arrangement allows you to have more profit flow into the pocket of somebody that’s putting more work into the company and have less profit flow to silent partners.
8. LLC Consultations Can Be Free
Still wondering whether or not LLC advantages are worth pursuing? Given the number of legal professionals offering LLC filing services, there are likely multiple in your area that will sit down with you and walk you through whether or not an LLC makes sense for your company at no cost!
Explore that free advice on managing your business today to find out for sure if jumping on the LLC wagon is a move worth making.
The Benefits of an LLC Far Outweigh the Ask
If we can hit one point home for you in this post, let it be that what will be required of you to form an LLC is far outweighed by the benefits of an LLC. If you’re a sole proprietor running a small business, in almost all cases, it would behoove you to step up into an LLC or another formalized structure.
Keep learning about LLC benefits online or talk to a local tax professional for specific advice.
If you’d like more insight from us, feel free to dive deeper into the content we have available on our blog!
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