Every year, more and more people are forming LLCs instead of other business entities. There are tax benefits compared to corporations, protection benefits compared to sole proprietorships, and they are generally less messy than partnerships. They allow for greater flexibility than many other ownership types and can be inexpensive to form. But to understand if an LLC is right for you, you need to first understand how these benefits work.
LLCs allow for pass-through income. This means that whatever profits your business shows will pass directly to the members as ordinary income. This means you avoid the double taxation associated with C-Corporations. You also will usually pay a lower overall tax rate than a corporation, which can add value even against an S-Corporation.
In addition, you are not required to file a complete separate return for an LLC as you are for many other business types. Instead, you can simply file a schedule C to your personal return, which is both easier and less expensive.
LLCs are Limited Liability Companies. As such, they help limit the liability of the members. This can be extremely important for businesses where there is a potential for lawsuits, where debt is involved, or where there are employees. In any of these situations, should something go wrong, the liability is generally limited to the LLC itself and the holdings of the business. So if you are sued or go bankrupt, your personal home and other assets would be safe.
Formation and Simplicity Benefits
LLCs are among the least expensive business entities to form and can be formed in a matter of minutes. They do not have annual paperwork requirements like corporations and are not as complex as partnerships or LLPs. Ownership is determined by percentages, making it less convoluted than other ownership types, and it allows for an unlimited number of members, making it extremely flexible.
LLCs are growing in popularity for a reason. They are certainly not the right choice for every business, but they are the right choice for many. If you are considering filing as a business entity, be sure to consult your CPA, but also be sure to ask if these benefits make sense for your business.
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