Should you Form an LLC?
Did you know that by forming a Limited Liability Corporation (LLC), your company is protected against lawsuits, there is a major reduction of paperwork that you are expected to complete when compared to corporations and other legal entity types, you avoid being taxed twice and the business comes across as more credible to customers and creditors?
Limited Liability Corporation is one of the several business structures to choose from, other examples are:
The Informal Business Structures which do not offer personal liability protection. Informal business structures do not offer taxation benefits or even personal liability protection. They are classified under two forms of structures:
Sole proprietorship– refers to a business owned by an individual that is not necessarily formally structured. As a sole proprietor, an individual need to file taxes under his or her name and is held personally liable for any actions taken against the business.
General partnership – refers to a business that is owned by more than one individual and the business is more formally structured. Taxes are filed under the names of the partners and partners are also liable for any action taken against the business.
So why should you consider forming an LLC?………………………………….
Protection of Personal Assets:
As an owner of an LLC, you will not be held personally responsible for the debts or lawsuits incurred by the LLC, provided that there are no criminal or fraudulent behaviour of course.
Did you know that the profits of an LLC go directly to its owners? So, LLC’s are only taxed once, so members are liable for reporting their share of the profits on their tax returns. When compared to C Corporations, that is subjected to “double-taxation”. LLC’s might pass-through taxation but there is still other state-level tax that is applicable. For example:
Many states usually levy a “franchise tax”, this is either by charging a flat rate or an annual amount and in some instances, they even charge a percentage based on the earnings of the respective LLC’s.
Unemployment tax and Income Withholding tax:
If the LLC has employees, then as the business owner it is important that the LLC registers for Unemployment Insurance Tax as well as Income Withholding Tax.
If the LLC will be having taxable goods or providing taxable services, then the owner will need to register for a permit, and the business is also eligible to collect sales tax on behalf of the state in which the business resides.
The simplicity of the process:
It is rather easy to form and maintain an LLC and another benefit is that the paperwork is minimal. LLC’s do require that any formal officer roles be assigned, there is no need to hold annual meetings and there is no need to record company minutes and resolutions.
The flexibility of the process:
Restrictions on how an LLC is structured and managed include; the LLC can either be single-member or multi-member. Multi-member LLC’s can be managed by its members and this is known as member-managed and businesses also have the option of electing to have the LLC managed by a manager which is elected by the members, this is known as manager-managed. There is also the added benefit of electing to be taxed as a C Corporation or an S Corporation.
The benefit of Increased Credibility
Did you know that forming an LLC helps your business come across as more credible? The fact that an LLC is recognized as a more formal business structure when compared to a Sole Proprietorship or even a partnership. So, incorporating LLC in your business name gives customers and partners the impression that you are more credible.
The benefit of being able to access Business Loans
After the formation of the LLC, the business can then start on building their credit history before they borrow money. As the credit history grows, it will allow the business to access loans as well as lines of credit.