Before any entrepreneur can fully open for business, they must decide how the company will be structured. In most cases, a small business owner will select one of three structures: a sole proprietorship, a partnership, or a corporation.
Each of these structures comes with its legal requirements and benefits. Still, one structure has become increasingly popular over the past couple of decades: the limited liability company, more commonly known as an LLC.
What is an LLC?
An LLC is a business entity that offers specific benefits to its owners. These benefits can include limited personal liability for the company’s debts and obligations and simplified taxation. Because of these benefits, LLCs can be a good option for small business owners looking to get started on their own.
Additionally, some professionals, such as real estate agents and insurance brokers, can form an LLC to protect their personal assets while still enjoying some tax benefits of self-employment. This is because the LLC structure provides what is known as “pass-through taxation.” The business itself pays no tax; instead, the owners report income or loss on their personal tax returns.
But even though LLCs don’t pay tax, that doesn’t mean they can’t have their own bank accounts. Many business banking solutions are designed to make it easy for small businesses, LLCs included, to set up a checking account and debit card. This can be an excellent way for entrepreneurs to keep their business and personal finances separate.
Why is an LLC Good for Small Business Owners?
An LLC is often the best choice for small businesses, as it offers protection from personal liability and taxes. It also helps protect your personal assets from business debt since they’re separated. All of these factors can help you avoid costly business problems that could cost you your savings, house, and even family.
Unlike corporations, LLCs are not required to hold annual meetings, which is another benefit for small business owners. By reducing the number of formalities you must adhere to, LLCs allow you to avoid confining rules that may not apply to your business.
Although other business structures can be appropriate for small businesses, LLCs tend to be the most suited. Suppose you want a business structure that can save you money in tax and liability, as well as provide a simplified accounting process and greater flexibility. In that case, you might be a good candidate for an LLC.
Legal Requirements for an LLC
When it comes to the legal requirements of an LLC, some things are essential to understand. First of all, you must file Articles of Organization with the state in which your business is located. These filings generally cost around $100, and they’re simply used to let the state know that you’ve begun business operations. You’ll also need to make an annual report with the Secretary of State.
Secondly, you’ll need to create an operating agreement for your LLC. This document produced by the company’s members outlines how the company will be run. That’s why it’s crucial to get this document completed before you open for business.
Setting up an LLC is generally straightforward, and you can do it yourself through certain websites. However, if you’re unsure of what you’re doing, it’s wise to consult with an attorney because the consequences of an LLC operating incorrectly could be severe.
How are LLCs taxed?
LLCs are not taxed like other business entities. Instead, the company’s profits are distributed to the owners, who report that amount on their individual tax returns. The LLC itself will not pay taxes because it is not considered a separate taxable entity.
However, this doesn’t mean that owners won’t have to pay taxes on revenues distributed by an LLC. For example, if you’re the sole owner of an LLC, the net earnings from the business will be included in your taxable income.
This is a big reason why having an LLC may make sense for your business. As an owner, you can split your profits between personal and business income, which allows you to pay taxes at a lower rate. This can help you save money on taxes, a significant benefit for small business owners.
Establishing an LLC takes a few forms and involves a bit of paperwork, but it can be an excellent option for small business owners. LLCs offer protection from personal liability and taxes, which is why they are so common among small businesses.
Of course, establishing an LLC is not the only thing you must do to run a successful small business, but it is one of the most important. If you’re thinking about making the LLC leap, it’s best to consult with an attorney before you do so that you’re sure to set up your business correctly.