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Benefits of Starting an LLC: 10 Advantages for Business Owners

Benefits of Starting an LLC
(Last Updated On: November 15, 2023)

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Starting a business is an exhilarating endeavor, filled with endless possibilities and the promise of turning dreams into reality. 

However, amidst the excitement, it’s crucial to acknowledge the potential risks and challenges that come hand-in-hand with entrepreneurship. Choosing a business structure is a tough decision. That’s where a limited liability company (LLC) can truly shine as a beacon of protection and opportunity. 

In this comprehensive blog post, we will dive deep into the world of LLCs and uncover the myriad benefits they offer to aspiring and seasoned business owners alike. 

From safeguarding personal assets to simplifying taxation, an LLC can be the cornerstone that empowers entrepreneurs to navigate the intricate landscape of the business world with confidence and peace of mind. 

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What Is an LLC?

What’s an LLC? An LLC, or limited liability company, is one type of legal entity that can be formed to operate a business. Forming an LLC provides a business owner with asset protection just like a corporation because it separates the business entity from the owners. 

The tax structure of an LLC, however, is closer to that of a sole proprietorship because profits and losses are reported on an owner’s personal tax return.

An LLC is just one way that a business owner can organize their business. Other options include:

  • Sole Proprietorship: In sole proprietorships, one person owns the business and does not have the benefit of any liability protection.
  • General Partnerships: A general partnership is like a sole proprietorship in that there’s no protection for liability, but in this structure, two or more people own the business.
  • Limited Partnerships: In a limited partnership structure, general partners operate the business and have personal liability, and limited partners, while they contribute to the business, do not have personal liability.
  • Corporation: A corporation (S Corp, C-Corp, etc.) is owned by shareholders or stockholders and provides the most liability protection for owners. 

This type of business structure can be complicated because the shareholders must elect a board of directors to make business decisions and run the day-to-day operations of the business.

An LLC is a great option for small businesses just starting out because, like a sole proprietorship, it’s easier and less expensive to form than a corporation, but it provides protections for the owner just as a corporation would.

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10 Benefits of Forming a Limited Liability Company

Benefits of Starting an LLC

Forming a limited liability company (LLC) offers a range of benefits for entrepreneurs and business owners. Here are some key advantages:

A limited liability company (LLC) is an entity that’s separate and apart from its owners, with its own rights, responsibilities, and liabilities. This means that an LLC can file a lawsuit (or be sued) in its own name. 

The company can also buy, own, and use its own real or personal property, make its own contracts and guarantees, lend money, and invest funds. Those who do business with a limited liability company must look to the company to satisfy any obligations owed to them and not to the LLC’s members or managers. 

Sole proprietorships and general partnerships don’t offer this protection. Any business that carries even the lowest amount of risk should form an LLC.

Limited Liability

Because an LLC is a separate entity, the owners of the company have limited liability. This is one of the most important benefits of operating as a limited liability company. 

Limited liability means that the individual assets of LLC members cannot be used to satisfy the LLC’s debts and obligations. A member’s risk of loss is limited to the amount that the member invested in the business.

CT Tip: Limited liability is not absolute. If a member guarantees the obligations of the business or co-signs a loan, then the member’s assets are at risk. Also, it’s possible for a court to disregard the LLC’s existence (“pierce the veil”) and reach the member’s assets. 

This can occur if the member completely dominated the company and did not treat it as a separate entity, used the LLC form to perpetuate wrong or injustice, or where it otherwise would be considered unfair to treat the member and company separately. 

Some state laws specifically state that the LLC’s separate existence can be disregarded to the same extent a corporation’s identity can be disregarded. But, even in states that do not have this statutory provision, courts have still acted to disregard the entity based on the member’s actions.

Perpetual Existence

Unless the articles of organization specify differently, a limited liability company has perpetual existence. 

This means that the owners can change without triggering the dissolution of the company. A member’s death, retirement, or withdrawal from the company for any other reason does not mean that the company must cease to operate.

Most state laws governing LLCs provide that the company is only dissolved when

  • An event specified in the operating agreement occurs
  • The members consent to the dissolution
  • A judicial or administrative action dissolves the company

In some states, the LLC Act provides that the death or withdrawal of the last remaining member causes dissolution. But even in these states, the LLC can provide that a new member will be appointed to continue the LLC.

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Inexpensive and Relatively Easy to Form

Compared to corporations, starting a business as an LLC is quite easy and inexpensive (usually less than $1,000). The exact process is determined by your state, but the paperwork is typically minimal, as is the cost. 

In addition to filling out a short formation document, you’ll need to file articles of organization and an operating agreement, which outlines the ownership structure of the new company. You don’t have to draw these up from scratch, templates can be found online. You can also enlist the help of a tax professional.

Starting an LLC is often more appealing to small businesses than forming a corporation because it involves much less operational complexity. LLCs aren’t required to hold an annual shareholders meeting, nor do they need to file an annual report each year.

Credibility

Forming an LLC is a step up in credibility from a sole proprietorship or partnership. Customers and other businesses will find an LLC more credible, and starting an LLC can show people that you are taking your business seriously.

Less Paperwork

Corporations are more regulated than LLCs and have considerably more paperwork. LLCs are not required to have a board of directors, keep meeting minutes, or hold shareholder meetings. This means much less time and money spent on keeping records and filing compliance-related documents.

Flexible Management Structure

Separate existence, limited liability, and perpetual existence are benefits of operating as either a corporation or a limited liability company. 

However, one benefit that’s specific to the LLC is its flexibility. The LLC’s members have many options for the management structure. By state law, the control over the LLC’s business rests with its members. 

However, the LLC, through its operating agreement and/or its articles of organization, can provide that it will instead be controlled by managers. 

Managers can be members or non-members based on what is provided in the operating agreements. This flexibility means that the LLC is suitable for a few owners who wish to run the business together, as well as for a business venture with many owners spread across the country. Read more about member-managed vs manager-managed LLCs.

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Free Transferability of Financial Interests

An LLC member is an owner of the LLC, and the member’s ownership interest is referred to as a membership interest. A membership interest has two parts: financial rights and management rights.

The members’ financial rights include the right to share in the profits and losses and receive distributions from the LLC. These rights are the personal property of the member, and the default statutory rule is that they may be transferred without restriction. (The operating agreement can be provided differently.)

However, most state statutes provide that there are restrictions on the transfer of the remaining interests, including the right to participate in the management of the LLC. 

This means that a member cannot sell or transfer his or her entire interest, including management rights, without the consent of all of the remaining members. Of course, the LLC’s operating agreement can alter the default rules. For instance, it can provide for less than unanimous consent.

LLCs also offer what is called “charging order” protection. This protects the LLC (and the other members) if a member’s personal creditors seek to seize the member’s LLC interest. While the creditors can reach financial rights, they generally cannot step into the shoes of the member with regard to managing the LLC.

Pass-through Taxation

A limited liability company is a “pass-through” tax entity. Put simply, this means that the LLC’s gains, losses, income, deductions, credits, and other tax items flow through to the member or members. 

The members report their share of these tax items on their personal income tax returns and pay taxes at individual tax rates. An LLC is not subject to entity-level taxation unless it elects to be taxed as a C corporation.

As a pass-through entity, the LLC doesn’t have to pay any federal corporate income tax. This means that the owners can avoid double taxation, which is not the case for owners of corporations. 

However, depending on the tax classification you choose, you may need to pay self-employment taxes. The four tax designations for an LLC are:

  • Sole proprietorship (single-member LLCs only): In a single-member LLC taxed as a sole proprietorship, the business profits pass through to the owners, and they pay income tax on the full amount. Owners are considered self-employed and must also pay self-employment taxes, covering Social Security and Medicare.
  • General partnership (multi-member LLCs only): In a multi-member LLC taxed as a partnership, the business profits pass through to each member, and each must pay income tax on their portion. In most cases, each member also pays self-employment taxes.
  • S-corporation (single or multi-member LLCs): Owners of an LLC taxed as an S corp may choose to pay themselves a salary and pay payroll taxes on their salary amount. 

The balance of the business profits pass through to the owners as income, but they do not have to pay self-employment tax on these profits. S corps also do not pay corporate taxes, as they are pass-through entities.

  • C-corporation (single or multi-member LLCs): When taxed as a C corp, all business profits are taxed at the corporate rate. Any profit distributions taken by LLC members are also subject to personal income taxes: this is known as double taxation. 

Members of a C corp don’t have to pay self-employment taxes, but any member that’s paid a salary by the LLC will pay payroll taxes on their wages.

A recent change in tax law known as the QBI (qualified business income) deduction also helps many LLCs qualify for a federal tax deduction on pass-through income. Through 2025, business owners with pass-through income may deduct as much as 20% of their net income on their federal tax returns.

CT Tip: This is an area where the flexibility of an LLC can prove extremely valuable. The share of the tax items can be established via the operating agreement and does not need to match the ownership interests. Moreover, profits, losses, and other tax items do not have to be allocated in the same proportions.

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Appropriate for Individuals

The advantages of an LLC don’t just apply to multi-member companies. Individuals can benefit as well by opting for a single-member LLC. 

You get personal asset protection, and you also have more flexibility in how you want to be taxed. For some businesses, electing to be taxed as an S corp may create tax savings, but state rules about S corp status vary, so make sure to do your local research.

Disadvantages of an LLC

Even though registering a business as an LLC provides the owner with great liability protections, there are limits to this protection. An LLC owner will still be personally liable in a lawsuit for their own negligence, even if the claim is related to the business.

An LLC also does not protect an owner from losses due to fires, floods, lawsuits, or an economic downtown. Therefore, it’s important to carry business insurance on your LLC.

Another disadvantage of an LLC is the lack of investment opportunities. If an owner is seeking to bring in outside investors, there are no stock options available in an LLC like there are in a corporation. 

Normally, an investor will trade funding for a share in the business stock. Without the available stock, there’s less incentive for an investor to invest in an LLC.

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Who Should Form an LLC?

If you are debating whether an LLC is the right business formation for you, ask yourself these two questions: “Do I have co-owners or employees?” and “Does my business have significant risks?”. If you answered yes to either of these questions, an LLC would benefit your business.

If you have a co-owner or employees, your business could potentially be sued for the actions of these people. Without the protection of an LLC, the business owner’s personal assets could be at risk in this lawsuit.

Opening any business is risky, however, some businesses pose more of a risk than others. Many property rental companies choose to use an LLC because each rental property will be its own entity. Failure or issues with one property will not put the other properties in jeopardy.

Benefits of Starting an LLC –  Frequently Asked Questions 

How Are LLCs Taxed?

Tax advantages are one of the main reasons a business owner will opt for an LLC over a corporation. An LLC is taxed by what is called “pass-through taxation.” 

This means that the profits and losses of the business pass through the business and are filed with the owner’s personal tax return. The profits and losses will be taxed based on personal tax rates.

This tax structure is much like that of a sole proprietorship. The LLC owner will report their business’s profits, losses, and deductions to the IRS using a Schedule C form filed with their personal tax return. If there’s more than one owner, each owner will file profit and losses with their own personal tax return.

Do I Need an LLC if I Am Self-Employed?

You don’t need an LLC if self-employed, but we recommend forming an LLC over a sole proprietorship because of the advantages that LLCs offer.

How Much Does an LLC Cost?

The main cost of forming an LLC is the state registration fee, which is between $40 and $500, depending on the state. If you decide to use a professional service to help with the formation process, there will be added expenses.

Bottom Line on Benefits of Starting an LLC

Running a successful business involves more than selling products or finding clients. It’s also important to get a firm grasp on the administrative side of things, including maximizing the benefits of your business structure and securing funding. 

Both individuals and larger companies can form an LLC to protect their personal assets and enjoy tax advantages.

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About the author

Dr. Alexander Sterling, Esq, a distinguished legal scholar with a business law degree and a Doctor of Juridical Science, is a leading expert in business registration and diverse business departments. Renowned for his academic excellence and practical insights, Dr. Sterling guides businesses through legal complexities, offering invaluable expertise in compliance, corporate governance, and registration processes.

As an accomplished author, his forthcoming book is anticipated to be a comprehensive guide for navigating the dynamic intersection of law and business, providing clarity and practical wisdom for entrepreneurs and legal professionals alike. With a commitment to legal excellence, Dr. Alexander Sterling, Esq, is a trusted authority dedicated to empowering businesses within the ever-evolving legal landscape.