Benefits of having an LLC
The first steps in setting up your business are amongst the most important ones. How your business is structured will determined how it’s treated by the government and how you’re taxed on the income made by that business.
Most small companies are set up as LLCs. That stands for Limited Liability Company and it refers to the liability of the owner for the debts made by the company. Here’s how setting up an LLC will affect you as a business owner and why you should do it.
Limited liability
The first and most common benefit is in the name itself. There’s a limited liability on the part of the business owner. This means that when the debts of the company are higher than its worth (including the worth of all of its assets), the owner isn’t liable with their own personal money to cover the difference between the two.
This also comes with an added problem making a diction between the personal funds of an owner and that of a business. If you’re not liable with your own money you also can’t send money from your personal accounts to the business.
Less paperwork
Paperwork is the thing that business owners and managers hate more than anything else. That’s always a big part of their work and it’s mostly about dealing with the government and taxation. This is something that needs to be done and that isn’t really productive.
There’s less of paperwork to worry about when you’re set up as an LLC. That’s why many small businesses decide to use this type of setup and thus avoid unnecessary work while the company is small and there are no employees to take it on.
Taxes
The biggest advantage of having an LLC rather than incorporating your business early on is in the way LLCs are taxed. LLC pretty much get the best of both worlds when it comes to taxation since there’s a difference in how corporations and sole proprietorships are taxed and LLC has features of both.
LLCs income and expenses can pass through the personal taxation process of the owner. This isn’t something corporations can do since they are a separate entity from the owner. At the same time, there’s the limited liability when it comes to debts and paying them of from the personal account of the owner, as we said.
More flexibility
There’s more flexibility when it comes to the ownership structure for an LLC. There’s a limit as to how much shareholder can a corporation can have and in most cases that limit is set one hundred. There’s no such limits as to the owners of LLCs.
All of these owners will be taxed in the same way, using what’s known as pass through taxation. It means you can make broad partnerships and enter into arrangements where some of your partners provide the finance and others provide the work or whatever fits your needs.
Management flexibility
There are rules and regulations as to who can manage a corporation. That needs to be someone who’s a member of its board and their role in the board and in the corporate structure is also very carefully determined by the law. That’s not the case with LLC.
This means that an owner can manage their own LLC, but also that they can hire someone else to do it for them. That also allows you to fire a manager and change your management structure as soon as your business requires it. That sort of flexibility can help a small company a lot.
Profit distribution
There’s also no rules as to how profit distribution works when you have an LLC. There are such rules when you have a corporation. The percentage of ownership in corporations needs to be the same as the profit distribution. That means that you get your share of profit in accordance to how much of the company is yours.
This isn’t the case with LLCs. With LLCs you can distribute the profits as you want. That means that you can have owners with the same amount of shares but one of them can earn more than the other because they have seniority or because they’ve worked more.
Conclusion
There are many benefits of setting your business up as an LLC. That means that the owner has limited liability when it comes to the debts that the business needs to pay off. When the business is set up as an LLC you get to have more flexibility when it comes to management, and profit sharing. You can also get to have as much owners as you want.
There are also tax benefits that are similar to those that corporations have but without the downsides that these large businesses face.
More from Mount Bonnell Advisors:
