Maximizing profits. Minimizing risk. Four words that often sum up the most important concerns for anyone who owns a business.
Starting your business as an LLC (limited liability company) offers advantages in terms of profits and risk protection. What is an LLC, and what are the benefits? We have the answers neatly wrapped and arranged for you below.
Six Benefits of Having an LLC
1. Limited personal liability.
Much like an incorporated business, an LLC can protect your personal assets, such as your house, car, cash, and investments. In general, only your business assets can be touched in debt collection or legal claims against your business. In most states, and under most circumstances, your personal assets are shielded.
That protection extends to situations where an employee, business partner, or the business itself is sued for negligence.
Along with shielding your personal assets, there are other benefits of being an LLC. It can protect control of the business resulting from a lawsuit. For example, let’s say you and a partner own an LLC together. Your partner loses a personal lawsuit that has nothing to do with the LLC.
The winner of the lawsuit can seek to receive your partner’s share of the profit distributions from the LLC. However, unlike with an incorporated business, the winner cannot gain any control over the management or operation of the LLC, which helps protect your interest in the business.
Protecting your LLC with business insurance.
How you structure your business is just one way to protect yourself financially. While the benefits of having an LLC include shielding your personal assets, you could still find yourself on the hook for accidents or negligence by you, your employees, or the LLC.
However, startup business insurance can protect your LLC from a variety of risks.
For example, a licensed and insured plumber is doing light repairs to the pipes in a customer’s remodeled bathroom. Unfortunately, he doesn’t secure the caps as tightly as he should have, which causes considerable water damage in the new bathroom.
The plumber’s general liability insurance policy could cover the $7,500 cost of repairing the water damage. The only out-of-pocket expense the plumber likely has is the insurance policy deductible.
Without this protection, the plumber would have had to pay the entire $7,500 out of pocket, plus any legal fees if the customer were to sue for additional damages.
Sometimes, something can go wrong with the advice you give or service you provide. Say you’re a tax accountant and you inadvertently place the decimal point incorrectly on a Form W-2. A while later, the client gets audited by the IRS and sues for your error and the additional IRS fees. Professional liability insurance can protect you and cover some, if not all, of your legal fees.
We can help you understand what type of coverage you may need, which we’ll find for you from top insurance carriers. Simple. It’s even in our name — Simply Business.
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2. Less paperwork.
One of the advantages of being an LLC is that there’s minimal paperwork required. That’s especially true when compared with corporations, which are required to publish annual reports, hold stockholder meetings, and conform to specific and often rigid management structures.
For an LLC, most states only require you to submit a report that includes the LLC name, address, and your LLC number, as well as your registered agent information. The report is required to keep your LLC in good standing with the state and ensure it hasn’t been dissolved. Depending on the state, you’ll only be required to file reports annually. In some states, it’s every two or even ten years.
3. Tax advantages.
One of the tax benefits of establishing an LLC is flexibility with how an LLC is taxed. For tax purposes, the IRS views an LLC as a sole proprietorship (if there is only a single member) or a partnership (multiple members). This allows for “pass-through taxation.”
With pass-through taxation, the profits from an LLC pass through to your individual tax return and are taxed at your individual income tax rate.
In both instances, if you expect to owe at least $1,000 in taxes, you likely will need to pay quarterly Estimated Tax payments to the IRS. If you have employees, you’ll need an EIN (employer identification number), and you’ll need to withhold and pay payroll (FICA) taxes on the employees.
An advantage of being an LLC over an incorporated business is that a standard corporation gets taxed twice. The first tax is on the company’s profits. The second levy is on the dividends that go to shareholders (which likely would include you).
There are other tax options you can consider for your LLC. Depending on elections made by your LLC and the number of members it has, your LLC can be treated as either a C Corporation or an S Corporation. This could help reduce your self-employment tax burden.
As with many considerations related to taxes and finance, the right choice often depends on specific aspects of your business, including state and local tax requirements. So it’s a good idea to consult an accountant, tax, or financial professional.
4. Flexible profit distribution.
One of the other benefits of having an LLC is how profits can be shared among multiple LLC members.
In most states, a member’s profit allocation matches their stake in the LLC. For example, if you have 60% ownership in the LLC, you’re entitled to 60% of the profits. This differs from a partnership, where each partner generally shares equally in the profits.
Certain states allow profits to be allocated in ways that don’t have to match ownership percentage. For instance, you may decide that members who contribute cash rather than property or services, should get a higher profit percentage, or vice versa.
To make sure the option you choose is right for you and your business, we recommend that you speak with a business attorney, accountant, or other financial professional.
5. Flexible management.
While traditional corporations must follow a certain structure (a board of directors, a chief executive officer, and other senior managers), one of the advantages of an LLC is that there’s more freedom and leeway in how it’s set up and run.
The LLC’s operating agreement spells out who is managing the business and what their specific roles and responsibilities are. All of the LLC members can be managers, or they can elect one member to manage the company. They can also hire managers who aren’t LLC members.
This flexibility also extends to voting rights. Much like profit allocation, voting rights do not have to be in proportion to ownership.
One of the other benefits of an LLC company is that the operating agreement is not cast in stone. It can be amended and changed to meet the needs of the business as it grows and matures.
6. Brand power and financing.
Being a small business doesn’t mean you need to be seen as a “small” business. One of the benefits of establishing an LLC is that it lets you create a name for your business that can help you stand out, especially if you’re in a crowded field or marketplace.
Most states require that you include the words ”limited liability company” or “LLC” as part of your name. That may be good for your business since a more formal business structure may give you more credibility with lenders and investors.
One of the other advantages of being an LLC is attracting and landing new business. Going after larger customers often involves contracts and meeting specific vendor requirements. In some instances, you may need to be an LLC to be considered.
An LLC is often seen as a more reliable, responsible business partner than a sole proprietor. That can be important for your customers. It shows the IRS and other government agencies that you’re not an employee of that corporation.
That’s often important for larger customers who must clearly differentiate employees from contractors to ensure their records accurately reflect paying the correct payroll taxes and other benefits.
Do I Really Need the Benefits of an LLC?
Before you commit to establishing an LLC, it’s a good idea to consider a few factors to determine if an LLC is right for your business.
You also should weigh the benefits of creating an LLC against the time, costs, and additional recordkeeping involved with getting an LLC up and running. For some businesses, it makes sense right off the bat. For others, moving to an LLC is part of a business’s growth.
Three Signs an LLC May Be Right for You
1. You have more at stake.
Some businesses come with more risk than others (e.g., an excavation contractor vs. a math tutor). Also, as your business grows, more customers and bigger contracts can add to that risk.
That’s true for even licensed and insured professional business owners. Approximately 36% to 53% of small businesses are sued every year, and 43% are threatened with lawsuits.
With an LLC, only your business assets are typically subject to claims and legal judgments against your business. For even more peace of mind, the right startup business insurance can eliminate a lot of worry.
2. You’re making more money.
Among the benefits of establishing an LLC is that it may offer more tax advantages than a sole proprietorship, which means you get a bigger piece of the pie.
For example, you may be able to elect to treat your LLC as an S corporation to lower your FICA tax. Talking with a tax professional who understands your particular business can provide more insight.
3. You’re working with bigger customers.
If the majority of your customers are businesses rather than individuals, looking more like a business can give you some added credibility.
Being an LLC can also make getting through the vendor approval process you’ll likely run into with business and corporate accounts easier. In fact, it may even be required.
Protecting Your Business with LLC Insurance
Whether you form your LLC on day one or as your business grows, it makes sense to get brand protection. That’s why we’re here.
At Simply Business, we make it fast and easy to protect all that hard work by helping business owners find the best LLC liability insurance and freelance insurance.
Your LLC Resource
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You’ll find all kinds of helpful articles, tools, and tips when you visit our online Resource Center. Here are just a few that provide more information about the benefits of establishing an LLC.