Finding the right structure is crucial when building your business. It factors into every facet of operation, from regulation to taxation. Depending on your business’s size and needs, you may want to consider forming a limited liability company (LLC).
We recently discussed the advantages of the S-corp structure. This arrangement offers valuable tax breaks to shareholders. But S-corps have high start-up costs and come with salary restrictions. If you’re fine with shouldering a greater tax burden for a greater income, then creating an LLC may be in your best interest.
What is an LLC?
By law, an LLC can be a corporation, partnership or sole proprietorship. It exists as a pass-through entity for tax purposes. LLCs count as income on the owner’s tax return rather than separately.
Even LLCs with multiple owners qualify for sole proprietorship tax status. This reduces the tax burden for the leadership team, who are then subject to individual – instead of corporate – tax rates.
What advantages do LLCs have?
A distinct benefit of an LLC is that it protects its owners’ assets from debts, losses and legal judgments. If you’re starting a business with your own capital – rather than with investor funding – this arrangement shields everything beyond what you’ve put into it. And LLC operations are simpler than those for S-corps, which need corporate officers and a board of directors to operate. LLCs can be as small as one person and don’t mandate the presence of other executives or advisers in the company.
Without shareholders and a board of directors, LLCs can operate in whatever way its leaders see fit. They don’t need to have annual meetings or make records of decisions or changes within the company. An LLC also has the advantage of easy dissolution. Whereas dissolving an S-corp requires the input of its leaders and advisors.
Forming an S-corp might make more sense if your business will receive outside investment or plans to grow by issuing stocks. But if you value ease in operations, adopting an LLC arrangement might make more sense. Working with a business law professional can help you decide whether the LLC structure meets your company’s needs.