One of the biggest concerns for any business is protecting its principals as well as its assets—and keeping personal and business assets separate is paramount. Forming a legal entity is one of the best ways to create a separation of personal and business assets.
For some entrepreneurs and business owners, one of the most economical types of entities to set up is an LLC – a Limited Liability Company. LLCs are a fusion of elements of a corporation, a sole proprietorship, and a partnership. This blog will discuss six benefits of using an LLC.
1. Limited Personal Liability
As a Sole Proprietor, the IRS considers you and your business to be a one-in-the-same. In a Partnership, each partner is personally liable for any debts incurred by the partnership, and thus, partners are individually and jointly responsible for any liabilities incurred by the partnership. So if you or (in the case of a partnership) your partner is sued for negligence, your personal assets might be at risk.
An LLC could eliminate those risks. An LLC exists as a legally separate entity from its owners, and LLCs are responsible for their obligations and debts. If this separation is properly maintained, your personal assets, (i.e., your home or personal bank accounts) would not be subject to business debts.
2. Easier to Maintain
Corporations, (both C-Corps and S-Corps) have more red tape that may be cumbersome for smaller, informally run businesses. Among these obligations are:
- The need to hold an annual meeting of directors and shareholders.
- Maintaining a record of those meetings (meeting minutes).
- Approval by shareholders and directors of major company decisions.
- Issuance and maintenance of stock certificate.
With an LLC, most, if not all of these obligations are not mandatory.
3. LLCs May Offer Favorable Tax Advantages
Depending on the number of owners, LLCs are, by default, classified as “pass-through” entities (either a partnership or a sole proprietorship) by the Internal Revenue Service. LLCs don’t pay corporate taxes unless they elected to be taxed like a corporation. Thus, the LLC’s income (and expenses) “pass-through” to the owners. For a single-member LLC, the profits and losses are reported on the individual’s Form 1040 (schedule C). In an LLC with more than one member, the profits and losses are reported on a K-1, similar to a general partnership.
On the other hand, C-Corps are taxed twice. First at the corporate level (currently 21% via the Tax Cuts and Jobs Act of 2017) and then again when you make distributions to the shareholders. In certain circumstances, it may be beneficial for the owners to elect to be treated like a C-Corp or S-Corp, and you should consult with an accountant or CPA to prior to making this decision.
4. Fewer Ownership Restrictions
LLCs not only provide pass-through taxation, but they have little-to-no restrictions on the number or type of owners they can have. In the case of S-Corps, there is a limitation on ownership structure. An S-Corp cannot; (a) have more than 100 shareholders, (b) have a non-US Citizen/Legal Resident shareholder, (c) have more than one class of stock, and (d) have 26% or more of passive income for three consecutive years.
5. Management Flexibility
Unlike Corporations, LLC’s owners have more options in running the business and decision-making. Corporate management structures consist of a board of directors who oversee company policies, officers that run the daily operations, and shareholders who vote on directors and major decisions. Owners (shareholders) must meet annually to elect directors and address other company business.
LLCs (generally) have no such requirements. An LLC can be member-managed, meaning the member(s) who formed the entity run the day-to-day operations, or manager-managed where someone who isn’t a member runs the day-to-day (a member could also be a manager). LLCs may also have perpetual existence. That is typically an issue with sole proprietorships and partnerships that don’t have explicit management agreements in place.
6. Profit Distribution Flexibility
If a corporation elects to do so, owner-shareholders may receive a distribution of profits. LLCs are provided greater flexibility in regards to profit distributions. Members can distribute profits as they agree (i.e, someone who contributed more labor or money during the start-up phase could receive a greater share of the profits).
How Can We Help?
Properly establishing an LLC without an attorney who has extensive knowledge in Corporate Law can be challenging. The Law Office of Elliott Brown offers guidance, which, unlike DIY services, is tailored to your individual needs.
Our services include:
- Researching the name for your LLC
- File the Articles of Organization
- Help you choose a registered agent
- Decide on member vs. manager management
- Create an LLC operating agreement
- Guide you on Out-of-state LLC registration
- Compliance with other tax and regulatory requirements
- File annual reports
Contact the corporate lawyers at the Law Office of Elliott Brown today for your free consultation and to find out if an LLC is right for you. Our offices are conveniently located in Monmouth County, NJ just 45 miles from NYC. For our international clients, contact us today to find out how we can help you bring your service/product to the NYC Metro Area market with a properly formed U.S. LLC.