What are the advantages of an LLC?
I get this question ALL the time.
If you’re thinking of starting a business, in most situation, LLC is the right choice.
However, what are the specific advantages of an LLC and what benefits does it have for you?
In this article, I will explain the advantages of LLC and why you should form an LLC.
And if you’re looking to start an LLC, email me at email@example.com
LLC is the easiest way to structure a business and protect your personal assets as the business owner.
The #1 reason to form an LLC is for personal liability protection. By forming an LLC you create a “protective wall” between your business assets and your personal assets so if your business is sued then your personal assets (like your personal bank account, home, cars, properties, investments or anything that you personally own) will be safe and secure as they will not be considered a part of the business. If you don’t form an LLC, your personal assets will be at MAJOR risk if your business get sued.
Also, with an LLC you will be able to open a U.S. bank. The biggest benefit of having a US bank account is that you will be able to avoid the fees of multiple exchanges of currency if you’re doing business in the US. Banking in the US typically requires having a US legal entity, such as an LLC. For these reasons, if you’re doing business in the US, you should form an LLC.
Further, LLC’s have simpler tax structures. Profits and losses get passed through to your personal income which means your LLC earnings just pass through to your personal income taxes. This also means accountants don’t have to file a separate tax form for the company, and file much simpler forms than for corporations, which also saves on costs.
Limited Personal Liability Advantage
Any business owner would agree the number one advantage of being an LLC is because of the protective wall it builds between you and the business. Under a sole proprietorship or a partnership, you and the business blend together as a single entity.
If your business partner is accused of negligence, LLC protects your personal assets from being at risk from someone else’s mistake.
If you decide not to form an LLC and your business partner goes down for negligence your bank account, cars, real estate, and anything of value could be taken away from you.
Ability to Open a U.S. Bank Account With an LLC
With an LLC, you have the freedom to open a bank account inside of the U.S. This is hugely beneficial as you can avoid fees involving currency exchange.
Moreover, banking in the United States requires you to have a legal entity in the U.S. For this reason, anyone doing business inside of the U.S. needs to form an LLC.
LLCs Have Simple Tax Structure
Taxes are confusing.
This, however, doesn’t mean you shouldn’t take a simple route when one is available. And, establishing an LLC offers that.
Under an LLC, your profits and losses will go through your personal income taxes. This allows you to save on cost by not having to file separate tax forms.
As an LLC, you get to enjoy the best of all worlds during tax season. Because LLCs lack a federal tax classification you can adopt sole proprietorships, partnerships, S corporations, or C corporations.
In fact, the Internal Revenue Service will automatically classify your business as either a partnership or a sole proprietor based on whether the business has one or more than one owner.
Should I Form an LLC or Corporation as Non-US Person?
As a non-U.S. person, you should NOT form a Corporation. If you’re a non-U.S. person and you’re not engaged in a trade or business in the US, you would not be subject to US taxes.
A Corporation is subject to U.S. Federal Income Tax on ALL of its income. So if you form a Corporation in the U.S., you WOULD be subject to U.S. Federal Income Tax on ALL of your income — which would make you liable to pay US taxes, when otherwise you wouldn’t need to be if you didn’t have a Corporation.
For these reasons, if you’re a non-US person, you should NOT form a Corporation. You should form an LLC instead.
A single-member LLC is disregarded as a separate entity from the owner. So the LLC is basically treated as nothing when it comes to US taxes. So it’s definitely best to form an LLC if you’re a non-US person.
Disadvantages of Forming an LLC
Naturally, there are pros and cons to anything you do in life.
The downsides of LLC’s are that many investors don’t want to invest in them, because they become Members and will have to pay taxes on the company earnings. There are also many institutional investors that are prohibited from investing in LLC’s.
Contact me at firstname.lastname@example.org to discuss your unique business situation and determine if an LLC is right for you.
Lack of Investors
One of the most challenging disadvantages associated with an LLC is locating investors.
Investing in an LLC means becoming a member. Members are required to pay taxes on the business earnings.
Under an LLC, you can’t slack off in the record keeping department. Moreover, you have to take special care to keep business and personal financial records and banking details separate.
Cashing a check made out to an LLC requires jumping through a few extra – and inconvenient – hoops. Namely, you are required to deposit them into a separate corporate account.
Fortunately, the overwhelming benefits of establishing an LLC outweigh the few minor downsides.
Is it Better to be an LLC or Corporation?
You see large, well-known, and easily recognized businesses operating as corporations and you assume that’s the way to go. For small business owners and start-ups, it just isn’t.
If you are establishing a U.S. business but do not live in the U.S. yourself, you absolutely SHOULD NOT form a corporation.
An individual who isn’t a resident of the U.S. is not subject to federal taxes unless they establish their business as a corporation.
If you live outside of the U.S. and establish as an LLC, you avoid the headache of U.S. taxes entirely.
While forming a corporation would make your business more appealing to investors, you would have deal with tax and accounting bills. Thus, making the business more expensive to manage.
When is Corporation Better?
Corporations are better for investors, because investors can passively hold shares without having to worry about tax consequences until they sell them again sometime down the road.
The downside of corporations are that they are taxed at a higher rate than LLC’s and they require separate filings with the IRS, which means added tax and accountant bills.
Why Shouldn’t I Form a Sole Proprietorship?
Sole proprietorship is a very simple business type and that makes it appealing.
It doesn’t require you to do any formal filing. The moment you start doing business activities you are considered a sole proprietorship.
As mentioned previously, personal liability is the biggest disadvantage to establishing your business as a sole proprietorship. In fact, it is the biggest reason why you should avoid sole proprietorship.
Under sole proprietorship your personal assets and your business assets blend together as one entity.
If something goes wrong and someone sues the business, anything and everything you own becomes at risk.
This means someone could sue your business for negligence and they could end up seizing your family home, your vehicles, and your bank account as compensation.
Establishing a business and becoming a business owner is a huge financial risk. But it becomes even more of a risk if you become a sole proprietorship.
The only time a sole proprietorship is a good idea is if you are setting up a low-risk business to test an idea. As soon as you plan on establishing something more formal and taking risks, you must switch to an LLC.
What Are the Advantages of Being an LLC?
To summarize, the reason you establish an LLC is because it offers liability protection, it avoids double taxation, it doesn’t require business meetings, managers run it, members own it, and it is easy to maintain.
LLC is Best for Dropshipping Business
If you’re doing any sort of dropshipping in the U.S., you’re going to have a hard time partnering up and doing business in the U.S. without an LLC. Most companies and vendors require that you show them your LLC, your EIN, and your sales tax information.
In fact, most companies will refuse to partner up with you if you can’t produce your LLC, sales tax information, and your EIN.
Is LLC Better Than S-Corporation?
As a business lawyer for entrepreneurs, people ask me all the time: should I establish an LLC or an S-corporation?
A corporation is for a business looking for investors, so they can scale things. An LLC is ideal for a company selling traditional products.
While an LLC – like any business – is expected to grow. It isn’t expected to need fundraising via investors to do that.
Is LLC or C-Corporation Better For Startups?
There are a few key differences between LLC and C-corp. These differences include how you can separate the ownership and the business income taxation.
Now, there are steps you can take to make dividing up the ownership of an LLC work. They just don’t compare to the same divide a C-corporation can offer.
Even with the workarounds, an LLC cannot issue stock whereas a corporation can. In an LLC, the profits are distributed to the members.
This divide in ownership results in C-corps being treated differently than LLCs when it comes to tax laws. This, in turn, is one of the biggest appeals to establishing as an LLC.
An LLC isn’t taxed as a business level, so you don’t have to deal with double taxation.
The profits of a C-corp are taxed. Then, the individuals are taxed for the payout dividends as well.
Startup businesses, however, are able to avoid the double taxation by using capital for growth instead of paying out dividends.
Do you want to keep your personal assets safe during business-related lawsuits?
Do you want to keep a low profile?
Do you want to maintain your privacy?
Do you want to limit how the amount of taxes you have to pay?
Do you want to keep your business and personal life separate?
Do you want to find funding sources for your company?
If you answered “yes” to any of the questions above, email me at email@example.com to start your LLC.
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