Owning your own business puts you at risk for various liabilities. Hence, many business owners choose to operate as LLCs to help safeguard against certain risks.
But just what is an LLC, and is creating one important for your business? It depends. So we comprised the following rundown of LLCs to help you decide for yourself.
What is an LLC?
An LLC, which stands for limited liability corporation, is a legal business structure that allows owners to operate with the personal asset and liability protection of a corporation while being taxed as a partnership.
These owners can be a single business, an individual, or an unlimited number of either or both.
Some Reasons Businesses Find it Important to Create an LLC
There are many reasons for businesses to apply for LLC, including:
Limited Personal Liability for the Actions of the Company
Perhaps the main reason many businesses choose an LLC structure is it frees the owners from being held personally responsible in the event the company faces legal action or defaults on its debt.
This is because an LLC is regarded as its own legal entity apart from its owners. Therefore, the owners’ property, cars, and other personal assets cannot be seized by plaintiffs or creditors seeking to collect from the business.
However, should the members of an LLC fail to exercise reasonable care, resulting in the injury of a third party, the owners may still be held personally liable for the harm. Members of an LLC may also be held personally responsible if they fail to fulfill their obligations to the LLC and more.
LLC members also risk losing their equity interest in the business.
It Helps Lower the Members’ Tax Burden
With an LLC, the business is taxed just once on each member’s federal tax return as opposed to being double-taxed on the same income the same as a corporation.
Hence, if the business suffers a decrease in profits, the loss can be spread across each member’s tax return to help lower the tax burden.
LLC members may also be able to deduct up to 20% of their business income under the Tax Cuts and Jobs Act for even more tax savings.
It Helps the Owners Raise Capital
As an LLC, you can also bring in other members as investors to help raise funds for property or other services needed to start, maintain, or expand the company.
It’s Less Complex to Establish
An LLC requires less paperwork than other legal business structures, so it’s less complex for the average owner to establish.
Once the LLC has been filed, the members are also not required to elect corporate officers, put bylaws in place regarding the management of the business, calculate shares issued vs. unissued for authorized shares, file annual reports, or hold annual shareholders’ meetings, or pay a yearly fee to maintain its status like a corporation.
Instead, the members of an LLC simply file an article of organization with the proper authorities that includes the name of the LLC, its main locations, the names of the members, and other required information to register its status.
There is also usually a fee required to file.
It Enables Members to Share Management Responsibilities
Having other owners as part of your LLC means more members to share the decision-making process with, which can help make running the company much easier.
It also provides the opportunity to enlist experienced people who are more skilled than you at running the business for greater success.
Just be sure to draw up an operating agreement that details your specific obligations and roles in the business so that everyone is clear.
On the other hand, should you choose to operate the LLC as a single owner, it means you can maintain sole control to make your own decisions without having to assemble a board of members like a corporation.
So is it important to create an LLC for your company? Many business owners would argue, yes, if only for the sole advantage of protecting the personal assets of everyone involved from plaintiffs and creditors. And you also don’t have to have members to still enjoy the protection of an LLC on your own while still maintaining full control of your business.