Find Out Why an LLC is The Most Popular Business Entity

One of the most important decisions you will make as a new business owner is the legal structure of your business. This structure – also known as an entity – determines the income tax return form you will file each year, ultimately affecting the earnings, overall profitability and success of your business. From Partnerships to Corporations to Limited Liability Companies, each entity has its own advantages and limitations.

A Limited Liability Company, usually referred to as an “LLC,” is one of the most common entity types, due to its flexible business structure and ability to protect personal assets of the business owner. It may seem like common sense to choose a structure that promises “limited liability.” After all, who wants more liability? The decision has far-reaching effects, so you want to make sure you research and consider the benefits and limitations for your individual business needs.

The ABCs of LLCs

There are several cornerstones of LLCs that are important to understand to determine whether or not the structure makes sense for your business.

Benefits

  • Protected assets: LLCs provide limited liability protection to their owners, who are generally not personally in charge of company debts and obligations. This means lenders cannot pursue the personal assets of the owners – such as homes, savings accounts or property – in the case of outstanding business debts or lawsuit settlements. In contrast, general Partnerships and Sole Proprietorships allow personal assets to be exposed, as the company and owners are legally considered the same. Simply put, an LLC separates and provides a layer of protection between yourself/your personal assets and your business, its assets and liability.
  • Pass-through tax: One of the biggest advantages of the LLC structure is its flexibility in filing taxes. LLCs, by default, are a “pass-through” taxation entity, which means any taxes on the income from your business are reported and  calculated on your personal income tax return (and those of any other owners/members). LLC owners are only taxed once, at the personal level, unless members elect to be taxed as a Corporation. If it is a multi-member LLC, then the default taxation is of a Partnership, which also passes through the taxable income from the LLC to the personal tax returns of the multiple owners.
  • Flexibility to choose how the LLC is taxed: Limited Liability Companies can elect to be taxed as an S-Corporation or a C-Corporation, instead of a pass-through LLC. This means that you, as an owner, are taxed on your personal return for the income of the business, and the business is taxed.
  • Fewer restrictions and requirements: There are very few limitations on who can become an LLC owner or how many owners an LLC may have, unlike S-corporations. LLCs also face fewer yearly and ongoing state-enforced demands. An added bonus? Less paperwork.
  • Flexible management arrangement: LLCs are free to establish any organizational structure agreed upon by the business owners. They can be managed by the owner(s) or by supervisors, unlike Corporations, which have a board of directors who oversee the important business decisions of the firm and officers who manage day-to-day issues.

Limitations

  • Self-employment taxes: One benefit of an LLC is the ability to be taxed on a personal level, rather than as a corporation. However, because LLC members are considered self-employed business owners rather than employees, they are not subject to tax withholding. Instead, each LLC member is responsible for estimating and setting aside enough money to pay taxes on their share of profits. Without proper planning, this can result in forking over a big unexpected check to the IRS during tax time.
  • Limited life: Most of the time, LLCs do not live on beyond their founding or “managing” members; the LLC must dissolve upon their death, bankruptcy, retirement, resignation, expulsion or dissolution. This lack of perpetuity can be a factor that causes new business owners to form instead as a Corporation, for example.
  • Lack of structure: Some business owners thrive when given freedom to manage a company as they see fit. Others may find this flexibility overwhelming and prefer more direction, structure and clarity of roles – from a board of directors of a Corporation, for example.
  • Annual franchise tax: Maintaining an LLC costs can average up to $800 per year depending on which state you filed your articles of organization with. While this can be seen as a drawback, the benefits of the LLC structure typically outweigh this cost as long as the company becomes profitable.

Many businesses benefit from forming an LLC, but it’s not right for every company. Because of the simplicity and flexibility, it is a very common option for many companies. Once you decide to start an LLC, the first thing you will need to do is get an EIN/Tax ID Number, or Federal Tax ID Number, for your LLC. You can file for your EIN/Tax ID using this link: https://app.govdocfiling.com/LLC.

If you’re still unsure of which entity type to choose, you can take a short survey to help decide here: https://www.govdocfiling.com/survey/. If you would like the advice of a small business lawyer or accountant on your specific needs, you can fill out this form, and GovDocFiling will coordinate a consultation.

Our philosophy is to help you get things done correctly the first time to avoid expensive issues down the road. No matter what kind of company you’re starting, GovDocFiling will walk you through the steps for selecting an entity, obtaining your Tax ID and getting your business off the ground.

About the author

From selling flowers door-to-door at hair salons when he was 16 to starting his own auto detailing business, Brett Shapiro has had an entrepreneurial spirit since he was young. After earning a Bachelor of Arts degree in Global and International Studies from the University of California, Santa Barbara, and years traveling the world planning and executing cause marketing events, Brett decided to test out his entrepreneurial chops with his own medical supply distribution company.

During the formation of this business, Brett made a handful of simple, avoidable mistakes due to lack of experience and guidance. It was then that Brett realized there was a real, consistent need for a company to support businesses as they start, build and grow. He set his sights on creating Easy Doc Filing — an honest, transparent and simple resource center that takes care of the mundane, yet critical, formation documentation. Brett continues to lead Easy Doc Filing in developing services and partnerships that support and encourage entrepreneurship across all industries.

Brett Shapiro: From selling flowers door-to-door at hair salons when he was 16 to starting his own auto detailing business, Brett Shapiro has had an entrepreneurial spirit since he was young. After earning a Bachelor of Arts degree in Global and International Studies from the University of California, Santa Barbara, and years traveling the world planning and executing cause marketing events, Brett decided to test out his entrepreneurial chops with his own medical supply distribution company. During the formation of this business, Brett made a handful of simple, avoidable mistakes due to lack of experience and guidance. It was then that Brett realized there was a real, consistent need for a company to support businesses as they start, build and grow. He set his sights on creating Easy Doc Filing — an honest, transparent and simple resource center that takes care of the mundane, yet critical, formation documentation. Brett continues to lead Easy Doc Filing in developing services and partnerships that support and encourage entrepreneurship across all industries.

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