LLCs: When does it make sense for your business?

Want the flexibility of a sole proprietorship while protecting your personal assets like a corporation? Creating an limited liability company just might work for you!

As your business grows and you settle into entrepreneurship, you might begin to enjoy the lifestyle you're building for yourself and your family. The idea that an accident or a malicious client could wipe away not only all the hard work you've put into your business, but also leave your personal assets (house, car, bank accounts, etc.) in jeopardy is not a pleasant one.

In cases like these, it may be time to start thinking about transitioning your business structure from sole proprietorship to an LLC.

What is a Limited Liability Company?

A limited liability company or LLC is a business structure which is utilized to protect its members (the term that is officially used to describe the owners of an LLC) from being held personally liable in the event something goes wrong in the business. Business creditors and those who may want to take legal action against the entity are limited to only going after the assets within the business; leaving the members' personal assets out of reach and fully intact.

Did You Know: For income tax purposes, the federal government/IRS does not recognized limited liability companies. This means LLC members can choose to be taxed as sole-proprietors or corporations depending on which is a more beneficial situation.

Pros

While being able to protect your personal assets is one great benefit of creating an LLC, there are a number of additional benefits that make LLCs a good choice for a many small and medium sized businesses. These include:

• Corporation "Lite": LLCs give some of the same great benefits as incorporating without the complexities of creating and maintaining a corporation. No need to worry about fussy board meetings, issuing stock or dividends, or other corporate requirements.

• Avoiding Double Taxation: Unless you opt out, an LLC is considered a pass-through entity. This means that your income does not get taxed on a business level. Instead, you only pay personal income tax on the business proceeds.

• Legitimacy: Some entities (like governments, banks, and consultants) and clients may see your business as more "official" and will be more comfortable working with you and giving you larger contracts.

• Profit Sharing Flexibility: Unlike corporations which have a more rigid profit distribution structure, LLC members have more control over how, when and what is distributed to its members.

Why would you consider creating an LLC?

• It will make my business look more professional/official
• My business is not ready to incorporate
• I want to protect my personal assets
• Incorporating seems like a lot of extra work

Cons

As with all good things, there are some drawbacks to consider before deciding that an LLC is the business structure for you. You should think about the following:

• Piercing the Veil: While LLCs do a great job of protecting your personal assets, they are not bulletproof. In some circumstances, including fraud and failure to clearly separate business and personal transactions, a judge can decide that your personal assets are fair game for creditors (this is called piercing the veil). So play fair and keep good, clearly delineated records of your business and personal finances. If only you knew of an accountant who could help with this...

• Self-Employment Tax: You may not get taxed twice, but unless you opt to be taxed as a corporation, LLC members are responsible for paying self-employment tax which is generally higher than taxes levied on a corporation.

• Starting from Scratch: Each time a member is added or removed from the LLC, the entity must be dissolved and reformed. This means members are responsible for the fees associated with formation and dissolution of the LLC as the business grows and changes. If you have, or plan to have a number of investors in the business, this can prove problematic and costly.

How To Get Started

The decision to start out as or transform into an LLC is one that requires the consideration of a number of factors including profit, number of owners, personal assets, and the particulars of how your business is run. If you're interested in finding out if an LLC is the right option for your business. Schedule a business growth consultation with us so we can help you choose the perfect structure for your business. Click the button below to get started.

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