An LLC, or a Limited Liability Company, is a corporate structure or legal business entity that we are used to seeing beside small business names as a suffix all the time. Now, there are ten or more types of entities to choose from, so why is it that most businesses in the United States go with the LLC structure? Is it the right decision, or would you be better off by forming a Corporation instead? Let’s try and find out next.
What is an LLC Exactly?
A Limited Liability Company (LLC) entity is the most common state-registered corporate structure chosen by small businesses for tax purposes mainly. As compared to a sole proprietorship or a general partnership, forming an LLC is always going to be significantly more expensive, given that the other two don’t require registration with a US state. However, the cost of admission is well worth it for more reasons than one, as you will see next.
Forming an LLC is Easy
Depending on the state that you are registering with, the rules and regulations will be different to an extent, but most of them are similar at least. However, when it comes to legal matters, similar is not same, which can create a bit of confusion for new business owners while trying to form a limited liability company in any state. However, resources like Howtostartanllc.com can help clarify any issues. With this guide, you can learn how to form an LLC and read up on whether an LLC is right for you. It’s really that easy, especially since the site has a separate page for each US state to ensure the differences between the state-level laws and regulations are not mixed up.
It Saves Small Business Owners from Personal Liability
If your business isn’t registered with a US state, it automatically functions under the same rules and regulations that govern a sole proprietorship or a general partnership (if you have partners).
What that means is that if someone slips and falls in your shop, you will have to pay for the compensation claim from your own pocket, provided they win. At the same time, any business debt that might be owed to a creditor will be collected by liquidating the owner’s or the partners’ assets, in case the business goes bankrupt!
In other words, unless you have registered with the state as an LLC, a corporation, or any other type of limited liability structures, all your personal belongings are going to be line to pay debts and settlements if the business assets, investments and cashflow can’t make up for it.
An LLC offers the cheapest way to secure personal assets from business debt collections and settlements by creating a legal barrier, aka limited liability, between personal and business assets. In the off-chance that your venture doesn’t work out, all of its belongings would likely be taken away for debt collection, but what you have not linked or registered as business asset cannot be taken from you by a plaintiff or a creditor.
Double Taxation: LLC is the Solution
Double taxation occurs when the owners/partners of a C-Corporation are taxed by the IRS twice. In case of a double taxation, the IRS will tax the business corporation and its owner/partners separately, essentially making the same people pay taxes twice!
While in C-Corporations, that may or not be optional, if you go with an LLC structure instead, double taxation simply won’t happen. The state will recognize the owner/partners and the organization as a singular entity, and tax them as such.
You can have the benefits of a sole proprietorship/general partnership, without having to lose sleep over personal liability. As far as small to even small-medium establishments are concerned, this is pretty much what makes an LLC structure unbeatable. It just doesn’t have any weaknesses at all, although that may not be applicable for larger organizations.
If You Ever Need a Change, It’s Easy with an LLC Entity
No one knows what the future holds, and unexpected things can happen at any time, especially when it’s a startup that we are talking about. The limited liability company entity is perfect for somewhat countering this uncertain nature of a new venture as well.
The owners/partners can very easily add more partners, sell present partnerships to interested parties, or even sell the business as a whole to a larger corporation, if and when they have/choose to. Do keep in mind that the same is also applicable for C-Corporations, but where the LLC structure has it beat is in the latter’s allowance of speedy, executive decision executive decisions. You can also employ a manager and let them manage the LLC - for more info on that we recommend this article 'What is a manager managed LLC'.
Not only are the regulations governing an LLC much more flexible, but in the absence of a board of directors, the decision-making process becomes a lot faster as well. If the partners, or at least a majority of the partners, agree on one of the scaling or even selling options, they can go through with it.
In the case of a corporation though, every big decision regarding the company must be passed through a board of directors and approved by a majority of them.
In all fairness, this is crucial to prevent monopoly up top in huge MNCs or even medium-large businesses for that matter. After all, the flexibility offered in a limited liability company is ridiculously convenient for the partners, because they can pretty much write the operative agreement to suit their specific business and personal needs!
Imagine a billion-dollar company with a million employees running things in that manner and you will likely see the problem here. As it happens, LLC or not, some of them are already pretty tyrannical, so they certainly do not need any more power up top!
However, when it comes to small businesses with a single owner or maybe even a few partners, that would be unnecessarily cumbersome and largely meaningless for the most part.
The LLC Can Protect Even the Self-Employed, Single-Man Business
Very few people take the initiative to form an LLC when they are working as a single professional, but they should consider it all the same. For example, a doctor’s home chamber for consultation can either be registered under a professional corporation structure, or it can become an LLC. In both structures, the physician is spared from medical negligence claims affecting his/her personal assets, but the latter is definitely a lot less expensive.
On the other hand, if the same physician didn’t register with the state at all, he/she will be seen and sued directly in a medical negligence claim. They would really have to be very good doctors to take that risk, especially when litigation is as common as anything.
Separation of business assets and personal possessions is the primary reason why everyone from professionals to small business owners prefer the limited liability company structure, even though it can be costly in the initial stages. The reason why they choose an LLC entity over the C-Corporate entity is, however, more related to cost, efficiency and practicality. If and when a startup becomes large enough, it may need to change its structure, which is also not that difficult because the LLC entity is pretty much at the first rung of corporate structures, making an upgrade easy and natural.