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What are the benefits of forming a limited liability company?

On Behalf of | Mar 5, 2024 | Business & Commercial Law

Starting a company involves making critical decisions about its structure to maximize benefits while minimizing liabilities and risks. One popular choice for entrepreneurs is forming a limited liability company (LLC).

An LLC is a business structure that offers some flexibility, as well as some tax benefits and personal liability protection. This makes it a viable and attractive option for business owners. Understanding the benefits of an LLC may help individuals who need to make a decision about their formation options in anticipation of launching a new company.

Personal asset protection

Personal asset protection is the primary benefit of establishing a business as an LLC. This structure creates a legal separation between the company’s debts and obligations and the owners’ personal assets, known as members. In the event of legal action against the business or if the business fails, the members’ personal assets are generally protected. This protection isn’t present in other business structures, such as partnerships or sole proprietorships, in which owners can be personally liable for business debts.

Tax flexibility

LLCs are (by default) taxed as pass-through entities, so the company doesn’t pay taxes on its profits. Instead, income and losses are all claimed on the member’s personal tax returns. This setup avoids the double taxation commonly associated with corporations, where earnings are taxed at both the corporate and the individual levels. On the flip side, in some cases, an LLC can opt to be taxed as a corporation if doing so would be an advantage to the business.

Simplified management and operational flexibility

LLCs don’t have as many state-imposed management and operational requirements as corporations. A corporation must have a board of directors. They must also hold annual meetings and keep detailed records of their proceedings. As an LLC, the members can manage the company themselves or appoint managers to handle the business operations.

Fewer formalities and lower startup costs

Starting an LLC generally involves fewer formalities and lower startup costs than corporations. The process is usually simpler and less expensive than incorporation, making it accessible for small business owners and entrepreneurs. Additionally, the ongoing compliance requirements for LLCs, such as annual reporting and fees, are often less burdensome than those for corporations.

Having legal assistance to learn about the exact requirements for any particular business formation is important, as this particular decision-making task is so consequential.