What Are the Main Reasons to Form an LLC When Starting a Business?

Published on: August 5, 2021

Last Updated on: July 14, 2022


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For many entrepreneurs, choosing a business structure is often the first big decision they’ll have to make. But as your business grows, you’ll find that the potential implications of this early decision will impact the future of your enterprise in many ways.

You can either choose to register your business as a sole proprietorship, corporation, or an LLC (Limited Liability Company). Let’s break them down below.

Understanding Sole Proprietorships, Corporations, and LLCs

Understanding Sole Proprietorships, Corporations, and LLCs

Of them all, a sole proprietorship is the easiest type of business to set up since it’s the simplest legal form of a business. It is also the most common business structure because it is owned by one person only and is often referred to as sole trading or individual entrepreneurship.

As the sole proprietorship grows, it can be transformed into a more complex business structure such as a corporation. A corporation is owned by one or more shareholders and is managed by a board of directors who are chosen by the shareholders. The board of directors then hires people who run business operations on a day-to-day basis.

A corporation is more convenient when multiple people are investing significantly into the business.

An LLC, on the other hand, is a legal entity that can own and run a business. The LLC is owned by one or more people who are referred to as ‘members’.

An LLC exists as a separate legal entity from the owner and they are primarily formed to limit the owner’s personal liability so that in the case of a legal dispute or bankruptcy, the owner’s personal assets such as their bank accounts and real estate properties are not classified as assets of the company.

LLCs combine most of the positive aspects of partnerships, sole proprietorships, and corporations into a single business entity. They are, however, much easier to form than corporations. Click here if you’re ready to start a business.

Let’s take a look at some major benefits you can expect from forming an LLC.

1. LLCs Are Easy to Form

The process of creating an LLC varies according to state. However, you can expect the general process to be relatively quick and easy. You don’t even need an attorney to help you through the process.

To form an LLC, you would have to come up with an operating agreement similar to articles of incorporation. The agreement needs to outline the rights and duties of each member. You would also need to fill and file certain forms with a designated state agency such as the Secretary of State. Expect to pay a small filing fee as well to complete the registration process.

That’s all it takes for you to be in business as an LLC. You can now go into contracts as the LLC and also assign patents to your company.

The only challenge you might expect is picking a name for your LLC because it’s the one thing that’s hard to change in the future. The business name also must comply with state regulations, and it must not be the same as an already existing LLC within the state.

We know it is really hard to handle all these things altogether. That is why you should opt for the best LLC service that will handle all the necessary things while you can just relax and plan your business.

2. Personal Liability Protection

2. Personal Liability Protection

There aren’t many things that scare business owners more than the prospect of them losing all their personal assets, retirement savings, properties, or fancy cars.

As pointed out earlier in this article, the primary reason people form LLCs is so that they can be protected from personal liability. This means that as the owner of the business, your personal assets are not at risk in case your LLC is sued or goes into debt.

If things don’t work out as well as you would like, your business assets will be liquidated rather than your personal assets.

If you’re still contemplating going into business as a sole trader, consider the fact that sole proprietorships are tied to the owner and do not offer personal liability protection.

3. Protect Your IP (Intellectual Property)

An LLC can help protect your intellectual property, such as trademarks, copyrights, and patents. You can register your patent or license your trademark and copyrights under an LLC to exploit the IP in any given way, as long as it’s legal.

The LLC can cut through various complications that could stand in the way of you not realizing the commercial potential of your IP.

However, while protecting your IP with an LLC is a very good precaution, try and place your patents and trademarks in different LLCs for easier management and avoid a complete breakdown if one LLC gets sued.

4. You Can Choose How You’re Taxed

4. You Can Choose How You’re Taxed

Your LLC will benefit from having flexible tax options as it expands. The current default tax structure for LLCs is ‘pass-through taxation.’

This means that the LLC’s financial gains and losses are not subject to federal corporate income taxation. Instead, the taxes ‘pass through’ to each member’s individual tax returns, where the members are taxed according to their personal tax rate.

This way, the LLC and its member(s) avoid double taxation, unlike corporations where the owners have to remit tax on their dividends, and the company also has to pay corporate income tax.

Sole properties, on the other hand, are taxed on everything since their business is not considered a separate entity.

You may go through 4 Reasons Why You Should Invest In ELSS Tax Saving Mutual Funds

5.  Flexible Management Structure

The beauty of an LLC is that it can be organized in various ways. The company’s structure is entirely up to the founder(s), unlike corporations, which have a very formal and rigid approach.

There are no mandatory rules that need to be followed since statutes under each member’s jurisdiction are stipulated by the operating agreement.

The Bottom Line

Before registering an LLC, you should know that this business structure has grown increasingly popular. The laws around it are still developing since it’s the most recent of all business structures.

The laws governing the formation and running of LLCs are not standard across the U.S., with each state having its own set of rules governing LLCs. Click here to get in touch with a professional who can assist you in determining if or not an LLC best suits your business needs.

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