A limited liability company, or LLC, is a hybrid corporate structure that combines the characteristics of both a corporation and a partnership or a sole proprietorship. LLC has simplicity, flexibility and tax advantages similar to a partnership whereas also provides liability protection like a Corporation. Because of its hybrid compilation, an LLC might be a good alternative to people who operate a partnership or a sole proprietorship and need to have more protection from individual liability for debts, loans or lawsuits. Because when you establish your business as an LLC, the business starts as its separate legal entity; therefore, its assets separated from the members’ assets.
Choosing a business entity is an essential part of starting a business. Here are some reasons why you should form an LLC:
It Provides Limited Liability
LLCs provide their members’ protection from liability meaning that the members are not personally liable for debts and lawsuits incurred by the LLC. Therefore, generally, the members can protect their assets (cars, bank accounts, investments, homes, etc.) from creditors of the company if there is litigation or bankruptcy
You Avoid Double Taxation
An LLC is considered as a “pass-through entity” meaning that all profits and losses pass directly to the members who then report their share of profits on their individual tax returns. Thus, unlike C-Corps where the profits of the company are taxed both before the distribution to the owners and after each owner report its share of profits on their individual tax return, the profits of an LLC are only taxed once without being taxed by the government on the company level.
Additionally, an LLC is not considered as a separate entity for tax purposes by the IRS. Therefore, the IRS does not tax the LLC directly at the beginning. Instead, the members of the LLC get to decide how they want to be taxed.
It is Easy to Register
Initial paperwork and fees to form an LLC are relatively light, but it is important to keep in mind that the fees differ from state to state. Although it is suggested to consult a lawyer for help, the process of forming an LLC is simple enough to do without special expertise. Additionally, LLC has the freedom from many of the legal formalities that corporations must deal with. For example; annual reports, director meetings, and shareholder requirements. Residency is not required to operate an LLC; therefore you do not have to be a U.S. resident to form an LLC.
It has Management Flexibility
An LLC can have one or multiple members (the official term for its owners). Members can be individuals or businesses, and there is no limit to the number of members an LLC can have. Members draft a contract called the LLC Operating Agreement that contains the regulations of the company and the rules that govern the members of the company. With this agreement, the terms and regulations of each LLC can be customized to accommodate the specific needs and preferences of an LLC.
How and where the LLC is formed will determine the extent of tax benefits and liability protection offered through an LLC. For example; Delaware is one of the most selected states when forming an LLC because of its predictable laws and corporation-friendly tax structure. You are also not required to disclose any information about the owner of an LLC to the state of Delaware. In Delaware, you need only to have a designated contact person and a Delaware Registered Agent. As mentioned above there are multiple reasons to form an LLC, but you should definitely consider your business type and decide accordingly.