Launching a small business as a sole proprietorship is often seen as the simplest practice for people looking to enter the corporate world with their own ideas. While the process of setting up a sole proprietorship may be easy, it thoroughly lacks the entrepreneurial benefits of setting up an LLC. For starters, LLC offers legal and debt protection for a small business.
First born in 1977 in Wyoming, the LLC structure has quickly become popular as the most flexible choice for both small and medium businesses. What’s more, Wyoming LLC enjoyed great tax, privacy, and asset protection laws, which soon translated to other US states. That said, those interested in starting their own small business should always be aware of the advantages to incorporate it.
1. Protect personal assets
Setting up a small business as a Limited Liability Company (LLC) provides more security for the business owners in terms of personal assets protection and liability. What this means is that the LLC structure separates the personal from the corporate. In the case of business debts and obligations, business owners (and LLC members) won’t have to deal with anything beyond their capital contributions.
So, if the LLC is managed and organized well, there’s no need to worry about what could happen to one’s personal finances and assets in case something unfavorable occurs on the business end of things.
2. Add credibility to your business name
Obtaining credibility and authority in business is already challenging to begin with due to the oversaturated market today. But by going the LLC route, small business owners can get a starting advantage in terms of the said authority and credibility, as the business name followed by “LLC” or “Inc.” instantly evokes a certain level of legitimacy.
After all, it’s not a secret that almost all partners, vendors, and customers tend to opt for doing business with incorporated companies. Not to mention that the incorporated brand name is legally protected in most states, meaning that other businesses cannot use it for their own branding. While this may seem like a small detail that’s easy to overlook at first, the fact allows LLCs to further up their business marketing and grow their reach.
3. Create a business that prevails
We already mentioned that the biggest reason why future business owners opt for a sole proprietorship is the ease of setting everything up. However, precisely because the formalities are so scarce, the actual business is tied to the business owner.
On the other hand, incorporating a small business equals its perpetual existence. Even if the business owner decides to leave the business or passes away, the actual business can simply change the management and continue to operate. This is especially important to consider for all small businesses that are not just a one-man show.
4. Manage more flexible taxes
Tax is often everyone’s main concern when starting a business. What many may fail to realize though is that LLC gets taxed at the same rate as a sole proprietorship. Yet, at the same time, LLC protects personal assets. It is true that both profit and loss in the case of LLC are reported on the personal income tax returns of owners, but it’s also true that every LLC can choose corporate taxation.
So, when one opens a business and sets it up as LLC, they get taxed both corporately and individually. But, they can also elect Subchapter S tax status, which allows the corporation to legally avoid double taxation of corporate dividends and profits.
While it is always better to enjoy a good CPA, the partnership-like taxation process of LLC means that all income gets taxed as a pass-through to the actual individuals. What’s more, regardless of whether one decides for LLC or Inc., they have the right to deduct regular business expenses, salaries included, before it’s time to allocate the income.
5. The structure itself is very flexible
LLC structure provides organizational flexibility like no other. The only member can easily be another entity instead of an actual person. It’s possible to use a partnership for taxation pass-through. The structure can have different member classes when it comes to voting and distribution rights. As there’s no legal requirement for annual meetings, it’s possible to limit small business and startup governance expenses. If you want one managing director and several passive ones, you can organize it. Or, if you’re keener on having a board of directors with member classes, you can easily go for it.
That’s not all though in terms of flexibility. Just because you set up a business as LLC, it doesn’t mean it has to stay LLC forever. If necessary, LLC can easily be converted into Corporation, Limited Partnership, or Investment Trust. It can even become a General Partnership if the circumstances demand it.
Corporation or LLC?
Keep in mind that corporations and LLCs are not one and the same. They are actually separate business structures, but they both enjoy benefits and protections. Regardless of which one is better for your business, you can continue operating free from worrying about potentially losing your personal savings, a car, or even your home.
If you can’t find your way around what type of legal structure to choose for your small business, don’t hesitate to get professional help from an accountant or an attorney. After all, with the right incorporation, you will effectively boost your business’s chance of success.