6 Benefits of Starting an LLC and 2 Drawbacks to Look Out For
Which business structure is right for you? Learn more about the benefits of an LLC and a few things to watch out for.
You may feel overwhelmed if you’ve started the journey to open your own business. We don’t blame you. There’s so much to consider, and questions may streaming through your mind. You might ask, “What’s the right business structure?” or “How should I pay myself and my business partners?” We’ve laid out some best practices for your path ahead so you can confidently face those questions.
Read more about types of business structures.
As you set up your small business goals, consider that an LLC may be the perfect solution for you. Otherwise known as a limited liability company, an LLC business structure allows you to skirt many challenges associated with larger corporations. As opposed to its most closely related counterpart — the sole proprietorship — an LLC is good at boundaries and creates a layer of separation between you and your business.
Read more about sole proprietorship vs. LLC.
To help you determine if these LLC advantages are a good fit when you start your business, we’ve put together a handy list of 6 benefits of an LLC (and a few disadvantages to keep it real).
What Are the Benefits of an LLC?
Shed the Weight of Personal Liability
One of the most important LLC benefits is in the name itself — limited liability. When you start a new business, there’s always some risk involved. What if things don’t pan out, you run out of startup money, or your partners turn out to be not so reliable after all?
In business and life, you always want to cover your assets. An LLC could be the perfect mode of protection. By incorporating your business, you create an entity separate from yourself. Whatever happens with business operations can’t spill into your everyday life. If your business experiences any financial stumbles, creditors cannot come after your personal property, other income, or anything that isn’t directly tied to your LLC.
If business is booming and you’re able to hire, it’s also a good idea to create a separation between you and your employees. An LLC can provide just that by allowing you to hire an unlimited number of employees under its name.
Simplify Your Filings
Think of your LLC as a half step between running your business as a sole proprietorship and becoming a full corporation. The tax advantages of LLC structures for small businesses mean you can avoid double taxation, as LLCs are not taxed at a federal corporate level. Instead, as an LLC owner, you only pay personal income tax on the profits and dividends of your business. Avoiding extra taxes can make a huge difference for owners just starting or who don’t bring in a significant income through their operations.
Make Decisions with Ease
Whether you own your LLC individually or as a member of a partnership, decisions are made simply with fewer cooks in the kitchen. You can remove the additional step involving shareholders or a board of directors. LLC owners manage their organizations by default, eliminating the need for a board. It’s simple to create an LLC with multiple owners, and each owner is responsible for reporting their share on their individual income tax, saving you the work of dealing with pesky tax documents for your partners. Essentially, this business structure lets you avoid extra roadblocks and red tape when you’re ready to move forward with any next step for your company.
Start-Up at Low Cost
If you’re wondering how to go about starting an LLC, it’s pretty straightforward. Not only is the process simple, but it’s also surprisingly inexpensive. The highest cost to start an LLC in the U.S. is $500, but in most states, the cost is closer to $50-100. Reserving your organization’s name or creating DBAs (otherwise known as fictional names) may cost extra, but these steps are not always necessary, depending on where you live. You can find more information in this LLC cost guide.
LLCs are relatively easy to maintain once you’ve covered the initial startup costs and requirements. In some states, you face annual reports and franchise taxes, and most states require annual or biennial reports to verify the basic ownership information of your LLC. As far as maintaining company records goes, these steps are about as minimal as it gets.
Stack Your Tax Refund
As an LLC, your company can write off eligible business expenses. These may include business dinners, transportation used for company purposes, necessary office supplies, and more. In some cases — particularly with more creative endeavors — your LLC may not even need to earn a profit every year to claim business expenses. These may include charges associated with creation, publication, outsourcing, any help you require, and more.
Credibility is Key
When it comes to any business, your reputation and credibility are super important. Creating an LLC allows you to advertise your company as a verified business, and adding “LLC” to the end of your name helps give your business cred. While LLCs may not be as strictly monitored as some more structured business models, they do require some documentation and proof that your company is working and making money. By meeting these requirements, you’ll be able to gain your customers’ trust and build a strong reputation for your business.
Are There Disadvantages of an LLC?
While it’s an excellent option for many, there are some disadvantages of an LLC:
All members of your LLC are considered self-employed and must pay self-employment tax based on your business’ net earnings each year.
An alternative to the LLC is the S Corp, another option when structuring a small business. If you choose to file as an S Corp, owners of the company can be listed as employees, which may create more fair taxation. However, when comparing S Corp vs. LLC, take note that S Corps do have some limitations that LLCs do not, such as the maximum number of employees.
There are some situations where a sole proprietorship may be an easier way for you to get your business started. If you’re beginning your business journey, a sole proprietorship allows you to get up and sprint without filing any additional paperwork. If you’re starting a business on your own, an LLC may not be necessary immediately. However, sole proprietorships can be a more straightforward solution for those working in fields that don’t carry risks, like many freelance jobs and consultant positions. The good news? Switching from a sole proprietorship to an LLC is always an option if you change course once you’re up and running.
While an LLC isn’t necessary for every new business, it’s a great way to protect yourself and your assets, gain some extra credibility and set up your taxes. Remember the pros and cons of LLC structures and see your new business thrive.