When starting a business, many decisions have to be made. Among them is deciding on the business structure. The type selected will have tax and legal implications. They include limited liability companies (LLC), S corporations, C Corporations, and sole proprietorships. LLCs are the most popular since they are simpler and more flexible compared to corporations, while they offer similar protections. By starting an LLC, the business becomes a legal entity with separate legal matters and debts from the owner.
Here are some of the reasons why it is advisable to adopt an LLC structure for a business start-up
In a partnership or sole proprietorship, you and the business are one person legally. This means that the debts of the business are yours legally. And if an employee or a partner is negligent, you might lose personal assets. LLCs are independently responsible for their obligations and debts. Although the money invested in them can be lost, personal assets like a bank account and your home cannot be used to settle business debts.
There is no specific federal tax classification for LLCs, and they can adapt the tax status of partnerships, sole proprietors, S corporations, and C corporations. Such business formations can take advantage of pass-through taxation whereby they don’t pay corporate taxes or LLC taxes. Instead, the income and expense of an LLC pass through the personal tax returns of the owner, therefore the owner pays a personal income tax on the profits.
Flexible Profit Distribution
LLCs have greater flexibility when distributing profits to the owners since they are not required to distribute equally or by the ownership percentage. For example, when two people have an equal interest in an LLC, they can agree that one will receive a bigger share of profits since he contributed more labor or money when starting up the business. On the other hand, corporations must distribute profits according to types and number of shares held.
Despite corporations offering limited liability, they observe numerous requirements that might not be appropriate to informally run, small businesses. For example, they must hold annual general meetings of the shareholders, pay annual fees and make annual reports. Record-keeping requirements are also substantial. In contrast, LLCs are not legally required to hold annual general meetings and do not have to keep extensive records. In most cases, LLCs don’t have to file the annual reports.