Ever thought about Why Entrepreneurs Are Choosing LLCs Over Other Business Entities? There is a reason why Limited Liability Companies (LLCs) are the most common business entity type for companies to incorporate as. This structure offers limited liability protection that is inaccessible by sole proprietorships and general partnerships as well as tax benefits that a corporation cannot capitalize on.
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In the United States, LLCs have become such an extremely popular choice by entrepreneurs for their small businesses because they’re easy and straightforward to form, supple to the needs of the owner, and well-suited to the demands of a new business. This article will explore what exactly an LLC is before examining why entrepreneurs are choosing it.
What Is An LLC?
A limited liability company is one of four main business entity types that entrepreneurs can elect for their company to be structured. The main characteristic of this business structure is the limited liability protection it affords the business. Furthermore, a division is placed between the personal assets of the owners and the business’s assets.
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What this means is that, similar to a corporation, the creditors of the business will be limited to the business’s assets to recover their loans. In other words, the personal assets of the owners (i.e. cars, houses, etc.) cannot be repossessed in order to cover the business’s debts.
This is not the case with the informal business structures of sole proprietorships and general partnerships, in which there is no legal distinction between the business and personal assets. As a consequence, these may be recovered in order to repay business debts if necessary.
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Statutes in all of the U.S. states permit the creation of limited liability companies, though their regulation differs slightly on a state-by-state basis. It is consistent across the country that no one is precluded from being an LLC owner (this includes foreigners, corporations, and other LLCs).
Following the filing of articles of organization with the state, an entrepreneur can form their company as an LLC. This is a far easier process of formation than that associated with a corporation, and the structure also contains a lot of inherent flexibility too.
Why Choose An LLC?
The corporation business structure also protects personal assets in the same way as an LLC, so what’s the difference between the two? Namely, a corporation is subject to ‘double taxation as the company’s profits are taxed, followed by the owners being taxed on their share of the profits.
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By contrast, LLCs are not subject to corporation tax on their profits before they have been distributed to members. Instead, the revenue ‘passes through’ to each member, who then only has to pay personal income and self-employment tax, as opposed to those that a corporation must pay.
Originally, the IRS treats LLCs as unrecognizable for the sake of tax, as the structure is purely regulated at a state level. As such, it disregards the entity in the same way it does for general partnerships and sole proprietorships.
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However, LLCs have the option to choose to be taxed as a corporation (or ‘C-corp’) if they so desire. In certain situations, this is beneficial to the LLC, though this is contingent on how the company’s revenue is dispensed to members. The simple reason for this is that the unrecognized structures are liable to pay self-employment tax while corporations are not.
Still, while they are taxed in the same manner as a corporation, the law will still continue to see the company as an LLC.
The process surrounding the formation of a corporation is incredibly convoluted and difficult to carry out, hence making the much shorter process of filling for an LLC comparatively simple, since they get to skip a lot of documents.
Another periphery benefit of forming your company as an LLC is that it makes it appear more legitimate in the eyes of customers, potential investors, and banks, especially in comparison to sole proprietorships and general partnerships.
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The business will be recognized as more credible, which could lead to more successful responses on applications for loans, investments, or other forms of credit.
It is clear why LLCs are so popular amongst entrepreneurs at the moment. There are numerous benefits associated with the structure and it just aligns perfectly with the situations new businesses often find themselves in (i.e. in need of credit etc.)
For more information on LLC insurance, please visit the TRUiC website.