One of the many decisions you’ll have to make when starting a business is choosing the right legal entity. There are several different legal entities available for business owners, including a sole proprietorship, S-Corp, C-Corp and limited liability company (LLC). Sole proprietorship, for instance, is the most basic structure, requiring no additional steps to be taken. Today, however, we’re going to take a closer look at one of the most popular and frequently used legal entities, LLC.
The single greatest benefit of using an LLC is asset protection. Basically, operating under an LLC protects the owner or owner’s personal assets from business-related debts and liabilities. If your business goes under and you have outstanding debt, creditors can not pursue your personal assets (e.g. savings account, house, car, etc.) for repayment. This is in stark contrast to operating as a proprietorship, which offers zero protection of personal assets.
Another advantage of operating as a LLC is the simple fact that taxes are paid on an individual level, not a business level. Income is passed through to the LLC’s owners, with the respective owner reporting it on his or her tax returns. It’s a simple format for handling income and expenses, eliminating many of the otherwise confusing nuances of Corporation tax filings.
Of course, there’s also the benefit of added credibility and trust associated with LLCs. Ask yourself, which business would you trust more: a business that operates under the owner’s real name, or a business that operates under a branded LLC name? If you chose the latter, you aren’t alone. Most consumers trust LLCs over sole proprietorships, making this the preferred legal entity of the two.
When compared to S-Corps and C-Corps, LLCs have minimal restrictions on the owners. This means you can spend more time running and growing your business, and less time worrying about the nuances of taxing and accounting.
These are just a few of the most noteworthy benefits associated with LLCs. It’s important to note, however, that there are also some disadvantages associated with this legal structure, such as the increased difficulty of transferring ownership. If you want to sell your LLC, you’ll have to jump through some additional hoops to do so. This doesn’t necessarily mean that you can’t sell it, rather it’s more difficult to sell when compared to a business operated as a sole proprietorship.