When you research the benefits of LLCs for entrepreneurs, you’ll find that it is highly advantageous. Entrepreneurs are always looking for ways to set up a business. These unique individuals are willing to put in the effort when others aren’t. However, they aren’t immune to the risks of launching a company. It is also always wise to be sure everything is optimized.
That is where a Limited Liability Company or LLC comes in. Forming an LLC can drastically reduce the financial risks for an entrepreneur. As the name suggests, a Limited Liability Company separates the owner’s personal liability from their business.
Many other perks come with this business structure, making LLC an attractive option for startups. So it goes without saying that LLCs have been gaining popularity in the US and have become the go-to choice for most entrepreneurs.
Despite Limited Liability Companies being an option for a long time, there are people out there that are just now learning about different types of business structures. While one selling point of an LLC is the limited liability, the benefits offered by this business structure span far beyond just reducing the liability of the owner.
If you are an entrepreneur planning on launching your business and considering LLC as your startup structure, we suggest you keep reading.
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What is a Limited Liability Company?
At its core, a Limited Liability Company is a hybrid business model structure that brings together the simplicity of a sole proprietorship or partnership and the perks of a corporation. The hybrid nature of this structure essentially means that it limits the liability for its members while having the flow-through taxation eligibility of a sole proprietorship.
Since most entrepreneurs start their businesses independently or have small teams, setting up an LLC is a good option. When you form an LLC, you get to keep the decision-making power to yourself. On the other hand, corporations that more shareholders own are often pressured to make certain decisions that the founder may not always be comfortable with.
State governments recognize LLCs, and each state is going to have its own laws regarding how an LLC is governed. There is no restriction on how many members an LLC can have, so you can set up a single-member LLC or a multi-member LLC to fit your business needs. With that said, certain types of businesses can’t register under the title of an LLC. The businesses excluded from qualifying for an LLC title include banks and insurance companies.
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Setting up an LLC can be simpler than registering and maintaining a corporation, making it an ideal option for entrepreneurs.
Figuring out the type of company to set up is only the initial step. You are now ready to initiate the next steps when you have a great business idea. For more information on what comes next, check out this video I have created. You’re sure to find it helpful.
What benefits does an LLC offer to entrepreneurs?
Now that you know what an LLC is and how it aligns with an entrepreneur’s needs, it is time to discuss the benefits of LLCs for entrepreneurs. Entrepreneurs look for more than just the extent of liability they share in a business. They need a quick and easy way to add credibility to their new startup, which is possible by forming an LLC. With that said, here are some detailed benefits of forming an LLC for entrepreneurs:
Limited liability in your startup
There is a lot that can go wrong when you launch a startup, no matter how much time and planning you put into it. A new business can become liable to some debts or lawsuits that can put an entrepreneur’s personal assets at risk of dilution. A Limited Liability Company reduces this risk by limiting an owner’s liability in the business. Since an LLC is a separate legal entity, its liabilities are also separated from its members.
Some types of liabilities an LLC can protect the entrepreneur’s assets from include:
- Liability for any debts that are due for your business.
- Any lawsuits resulting from the actions of the LLC staff and its business owners.
- Liability from the personal actions of the LLC founder.
- Liability for any debts that any member of the LLC owes.
So if any liability arises against your business, the creditors generally can’t go after your personal assets. This means the creditors will only be able to look towards the business accounts and assets to recover what your business owes them.
It is highly encouraging to have this security in place for personal assets when planning a new business venture as a budding entrepreneur. An entrepreneur doesn’t get this if they choose to form a sole proprietorship or a partnership-based business. Law views a sole proprietorship and a partnership as the same entity as their owners. This means if your business becomes liable to a debt or lawsuit, your assets can be diluted to pay the creditors.
With that being said, it is important to note that while LLCs reduce the liability of their owners, they don’t eliminate it. This means you can still be held personally liable to some lawsuits and debts. In case you face a negligence lawsuit where a person is harmed due to the negligence of your business, the owner can be held personally liable despite an LLC status for their business. Even so, take the time to understand the benefits of LLCs for entrepreneurs.
Setting up an LLC is easy
Launching a business is often complicated. Entrepreneurs have to focus on developing a product, marketing it, and getting it into the hands of the customers. So they need a business structure that they can register quickly without complex legal requirements, paperwork, and long waits. Even more importantly, there are no large fees associated with forming an LLC.
Compare forming an LLC to forming a corporation, and you will soon realize that corporations require a lot of paperwork and other criteria that need to be met on an ongoing basis. Not to mention you don’t need dedicated members to form an LLC, and you can do it as a single member or with a few members. Unlike a corporation, an LLC doesn’t have to go through corporate regulations either.
As an entrepreneur, all you need is some basic paperwork, a small fee, and the process of registering an LLC can be complete within a day. The fee for registering an LLC differs from state to state, so depending upon the state you are registering your business in, you can pay as little as $50 or as high as $520. More if you choose a third-party service to help.
You can control your taxation
Every entrepreneur dreaming of launching a company has to think twice about the taxes that come with running a corporation. However, when you form an LLC, you can choose how you want your business to be taxed. For example, if you register your LLC as a single member, your business will be taxed as a sole proprietorship; on the other hand, multi-member LLCs will be taxed as partnerships. The benefits of LLCs for entrepreneurs when it comes to taxation is that you can report your business earnings through your personal tax returns.
So when an entrepreneur registers their business as an LLC, they can make sure double taxation doesn’t apply to the business. Double taxation means that an individual’s earnings are taxed twice as the regular income and once at the corporate level. This means forming a corporation can subject your income to being taxed twice, which is not ideal for an entrepreneur who is just launching their startup.
In addition to choosing to be taxed as a sole proprietorship or a partnership, an LLC can also choose to be taxed as an S-corp. An S-corp also gets pass-through taxation, which means if you register an S-corp, you wouldn’t have to report your business income. Instead, the income from your business would be reported on your personal income tax returns.
The ability to avoid double taxation alone is a major reason why entrepreneurs prefer an LLC over a corporation when registering their startup. With taxation simplified, an LLC allows entrepreneurs to focus on growing their business revenues without the worry of double taxation. This is just one of the benefits of LLCs for entrepreneurs.
No need for a formal hierarchy
A major benefit of an LLC for entrepreneurs is that they can register their business without a formal hierarchy. They don’t need to have a board of directors or various managers to oversee various aspects of your business for forming an LLC. You can run your business on your own or choose to hire managers to assist you in managing your daily business operations.
The freedom to be able to run a business without a formal management hierarchy is something you can’t get if you register as a corporation. A corporation must have a board of directors and a formal set of rules that the company is governed by. A Major benefit of running your startup without the formal structure is that you can implement your ideas better and don’t have to share the decision-making power. Of course, you can always hire managers to help manage aspects of your business that you are struggling with, but there are no requirements for a formal organizational hierarchy to set up an LLC.
The freedom of being able to register an LLC without a complex management structure means you can always make changes to your business when you deem fit. Or, in the event that you want to sell your business or retire, you can do so at your own will. There is no board of directors dictating how you can run your business.
Note that some forms of business entities, like the S-Corp, can allow you to reclassify your company later if you see changes in your plans or great growth.
Add credibility to your business
A startup that is registered as a sole proprietorship or a partnership is often viewed as less credible than a corporation. Entrepreneurs often face this issue where they have a solid idea, a great work ethic, and a unique product but fail to get finances because the financiers aren’t confident in their abilities to pay back the borrowed amount. Similarly, customers and business partners will also find an LLC more credible than other forms of business.
There is also a legal requirement to add LLC as initials for your business, which adds to the legitimacy. An entrepreneur can benefit from the added credibility and leverage it to get their business noticed.
All of these benefits that LLCs have to offer make them the ideal choice for entrepreneurs. LLCs can be started with little effort and cost, add legitimacy to the startup, reduce the owner’s liability, and simplify taxation. So if you are an entrepreneur who was planning on registering your business as a sole proprietorship, then LLC is a step above the traditional business structures. However, LLCs come with some disadvantages compared to a sole proprietorship, which we will discuss in the next section.
What are some disadvantages of an LLC?
While the pros of forming an LLC far outweigh the cons, there are still some disadvantages of an LLC that you should know about before adopting this business model. With that said, here are some cons of an LLC:
- LLCs cost more to form compared to a sole proprietorship because of the filing fee that can reach up to $520 in some states.
- Annual fees and taxes are to be paid by LLCs, which means the operational cost of an LLC is going to be higher.
- Investors may prefer to invest in C-Corps over LLCs.
When you compare the pros and cons of forming a Limited Liability Company, it is clear that the pros outweigh the cons by a lot. So it goes without saying that the LLC is worth the extra registration fees and annual fees that come with it. After all, your personal assets are going to be worth a lot more than a few hundred dollars you have to pay for an LLC. However, the asset protection you get from this business structure is going to save you a lot more if a liability case is filed against your business. So, take the time to understand the complete benefits of LLCs for entrepreneurs.
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