Reading an article about limited liability companies (LLCs), eh? You’re likely a savvy side gigger looking to take things to the next level—and forming an LLC is a surefire way to make that happen.
An LLC helps limit your personal liability (hence, limited liability company), maximize your write-offs, flexibly share profits, and qualify for business loans. Plus, you get to add LLC to the end of your business name, which makes you look pretty legit.
These are just a few of the many benefits of an LLC, but we’re getting ahead of ourselves. First, let’s get on the same page about what an LLC is—then, we’ll walk you step by step through all the reasons you should start an LLC.
What Is an LLC?
LLC stands for limited liability company. It’s a structure for US businesses that protects owners from becoming personally responsible for company debts or legal issues.
If you own a sole proprietorship and default on your loans, the banks can potentially take away your home, vehicles, and savings. With an LLC, your personal assets are protected from business disputes.
Your LLC can be owned by an individual (you) or multiple members. Solo-owned LLCs are called single-member LLCs, and LLCs with multiple owners are called multi-member LLCs. Makes sense.
LLCs aren’t new. They’ve been around since 1977. However, they’ve been growing in popularity recently, and for good reason. They’re the easiest way to protect your personal assets without the tedious formalities of a corporation.
It might be best to convert into a corporation at some point in your business’s life. However, that doesn’t mean you need to do it from the get-go. If corporation status is in your future, work towards it slowly. Start as an LLC and enjoy the extra freedom and evolve into a corporation if or when the situation demands.
Don’t Skip: Sole Proprietorship vs. LLC
8 Undeniable Benefits of an LLC
It wasn’t hard for us to come up with a list of benefits of an LLC—there’s plenty of them. Each of these benefits alone is reason enough for a sole proprietor to make the switch. Let’s look at each of the benefits in more detail.
1. Form an LLC in No Time
Forming an LLC isn’t complicated. You can get all the paperwork put together and submitted in just a couple of hours—and it’ll only require a small fee.
You don’t need an operating agreement, shareholder meetings, meeting minutes, shareholder records, business resolutions, annual reports, or any of that corporate nonsense.
Plus, you can form an LLC on your own. You don’t need multiple members like a corporation does.
LLCs are more laidback. You’ve got enough to worry about with running every other aspect of your business—corporate regulations don’t have to be another thing on your to-do list.
Remember, you’ll have ongoing requirements and paperwork to maintain your business status. These usually come on an annual basis. The paperwork and fees are light, but they’re something you’ll want to budget for.
Your fee to form an LLC will depend on your state. You pay just $50 to file for an LLC in Colorado but $520 to do the same thing in Massachusetts. You’ll also have to pay a fee for your LLC annual reporting. This could be anywhere from $0 to $520, depending on your state.
While this might seem like a hefty fine, you’ll almost always recoup that cash (and more) with your LLC tax savings.
2. Limit Your Liability
An LLC separates your business from your personal identity. When someone sues your LLC, they’re suing your company—not you. Banks and plaintiffs might be able to claim your business assets, but they (usually) won’t be able to touch your personal belongings. That means your house, car, and savings account are safe.
Compare that with a sole proprietorship or partnership. The government views these business types and their owners as one and the same—if someone goes after your business, they’re going after you, too. Once they’ve taken your business assets, they can go after your personal assets to satisfy the remaining debt or settlement.
However, just because you form an LLC doesn’t mean you’re protected from everything. It’s called limited liability for a reason—the liability is still there, but it’s just a bit more restrained.
For example, if you personally guarantee a business loan, you’ll be personally liable—regardless of your business’s legal entity. And if your negligence causes harm to a third-party victim, there’s a good chance you’ll be liable, too.
3. Choose Your Tax Status
With an LLC, you have options. Single-member LLCs are taxed as sole proprietors, and multi-member LLCs are taxed as partnerships—meaning the IRS subjects both to pass-through taxation. With pass-through taxation, you won’t have to report your business taxes separately. You’ll just report your business earnings when you submit your personal tax return.
Taxing your business as a pass-through entity lets you avoid the double taxation corporations face. However, you can also elect to tax your LLC as a C-corp or S-corp if you’d like. Taxing your business as an S-corp can help you reduce your tax payments and maximize your business deduction—plus, you’ll still avoid double taxation. It’s a win-win situation for most LLCs. However, you’ll want to talk to a professional to ensure it’s the right decision for your business.
4. Manage How You Want
LLCs can choose to hire a manager or have the members (owners) run the business. This freedom gives you more flexibility in how you operate your business day to day and year to year.
Corporations don’t share that flexibility. Corporations must follow a more formal set of rules. Shareholders elect a board of directors annually, and this board is responsible for hiring a CEO or general manager to oversee the business.
You don’t need to worry about that bureaucracy with your LLC. You can manage the business yourself (without fear of being replaced). If you decide you want someone with more experience (or time) to run the business, you can delegate the responsibility to a manager without having to get permission from a board.
This management flexibility might not seem like a big deal now, but it could be in the future. You might want to explore other business opportunities or step down from your role managing the business—that’s completely natural for an entrepreneur. With an LLC, you can do that without red tape or someone telling you “no.”
5. Boost Your Credibility
Trust is a big part of doing business. Whether you’re searching for a business partner, new client, or business loan, you have to earn trust first.
While there’s nothing inherently wrong with sole proprietorships or partnerships, they’re often viewed with a lesser degree of legitimacy. To some extent, it makes sense—you don’t have to do anything except make a penny to form these types of business entities.
Starting an LLC signifies a bit more intent. It shows you’re serious about your business and willing to put in the fee, paperwork, and time to make it legit. Even if they don’t exactly know what an LLC is or why it matters, the world cares and notices.
When you form an LLC, you must add the initials “LLC” to your business’s name. It’s part of the very few rules of owning an LLC. What’s nice about that requirement is that it makes your name legit without being pretentious—you legally had to add “LLC” to your name.
6. Qualify for a Business Loan
Your business will likely need financing at one point or another. It takes money to make money, but finding capital is easier said than done. Even if you have equity to give away, a small business loan is almost always a more affordable option.
Loans get paid back, but equity costs you a percentage of your business forever.
However, many banks and alternative lenders don’t want to lend money to sole proprietors and partnerships. Again, it goes back to trust. They want to know a borrower will make their payments and avoid default—and forming an LLC gives lenders that extra bit of confidence.
Owning an LLC also means you’re personally protected in the unfortunate case you default on a business loan. Lenders recognize that disconnect and often require you to sign a personal guarantee to ensure you have more skin in the game. This personal guarantee does put your personal assets at risk, but it’s usually necessary if you want to qualify for substantial financing.
7. Protect Your Brand
Forming an LLC gives you exclusive rights to your business name. Once you form an LLC, no other business in your state can use the same name. They can’t even use a similar name.
If you’re serious about your brand and want to prevent another company from legally stealing it, an LLC is one of the easiest ways to protect it. However, it’s just the beginning.
Forming an LLC prevents another business in your state from starting a company with the same name—but people in other states can form a business with the exact same name. For example, you might start Sara’s Sweet Shop in Virginia, but another entrepreneur (whose name might not even be Sara) could start a Sara’s Sweet Shop in West Virginia or North Carolina.
That’s why you’ll still need to trademark your brand. Trademarks will give your business exclusive rights to your name, logos, and taglines. Trademarks aren’t just limited to your state.
8. Start a Solo 401(k)
If you don’t have any employees, you can start a self-employed 401(k) (also known as a solo 401(k)). These retirement plans work similarly to standard 401(k)s. You can make pre-tax contributions to your plan and invest those savings into various vehicles to grow until retirement.
However, unlike a traditional 401(k), you can contribute even more cash. Employees (that’s you) can contribute up to $19,500 as an employee, and then the business can contribute up to 25% of your compensation each year (up to a maximum of $58,000 in 2021).
Should You Switch to an LLC?
Some professionals advise that the tax benefits of creating an LLC aren’t worth it until you’re making a healthy amount of money. However, that completely overlooks all the other benefits of starting an LLC.
Limiting your liability is reason enough to form an LLC. An LLC also boosts your credibility and helps you qualify for business loans. While it might not be “worth it” in terms of tax write-offs, those benefits are hard to ignore.
Plus, it’s easy to form an LLC. You can form an LLC on your own if you’d like, though it’s better to work with a professional to ensure you get it right. It’s relatively cheap, too. You’ll pay a few fees, but that’s it.
So, if you asked us whether you should form an LLC, we’d say: “Yes.” Protect your personal assets, reap the tax benefits, and make your business legit.
However, we’re not tax professionals nor lawyers, so consult with one of those before making any legally-binding decisions. Better yet, talk to a finance-savvy tax attorney who can help you with regulations and finances.
Frequently Asked Questions About Benefits of an LLC
When should I start an LLC?
You should start an LLC if you’re starting a business where you could be liable for lawsuits or damages from a client or customer. If you’re a freelancer or contractor, you should create an LLC once you’ve peaked at three figures or require significant business costs.
Who can own an LLC?
Anyone can own an LLC as long as you meet the regulatory requirements.
Can an LLC have multiple owners?
Yes, you can have multiple owners of an LLC called a multi-member LLC.
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Keep Learning: Incorporating Your Business: The Why and How of It
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