In the age of freelancing and side-hustles, it’s easy to think you can start a business free and clear without incorporating. But as a freelancer or sole proprietor, there is no separation between your business and personal assets.
That means if you’re ever targeted by a lawsuit (and lawyers love targeting small business owners), you risk losing EVERYTHING—your savings, home, retirement and other personal property.
Today, we’ll break down the top reasons to form an LLC and why it’s the most important decision you could ever make for your business.
What is an LLC?
LLC stands for Limited Liability Company. As hinted at by the name, LLCs limit the legal responsibility of the owners/shareholders from business liabilities and lawsuits.
This is because, in the eyes of the law, LLCs have their own existence. Think of them as artificial people. The LLC owns the business, not the people forming it. Additionally, your LLC can enter into its own contracts and deals, can sue someone and be sued, and is liable for its own debts and obligations.
By blending the aspects of corporations, partnerships and sole proprietorships into a simple and flexible business entity, LLCs shield owners and operators from personal liability (similar to a corporation) and have the “pass-through” tax benefits of a partnership.
Additionally, LLCs offer the same personal liability protection as corporations, but do not require the typical formalities of managing a corporation.
Do You Need an LLC to Start a Business?
You don’t need to form an LLC to start a business, though there are several advantages to incorporating with an LLC. Before we get to what those are, let’s look at other different types of business entities:
A Sole Proprietorship links a business entity to your personal social security number. You can legally open a business as a “sole proprietorship”, but it means that all liability and visibility of the company will be tied to the business owner. There is no legal separation between you and your business in this structure.
If you have a business partner, the two of you can form a general partnership—the simplest business structure. However, you won’t have any protection from personal liability when it comes to business debts or if your partner does something related to your business.
LLC or Corporation
These business entities are registered with the Secretary of State and will provide asset protection and tax benefits to the business owner. Both entities will have their own tax identities, separate from the business owner.
Corporations are similar to LLCs, though they’re owned by the shareholders/stockholders (read: investors) who provided the funding for the business. These investors then elect a board of directors, who are the ones who make the overall business decisions.
A DBA (Doing Business As), is a fictitious name that one may operate their business under. This is not an actual business structure and will provide no asset protection or tax benefits.
Why Form an LLC?
The primary reason people form LLCs is because of the liability protection it affords – but that’s far from the only advantage. Let’s jump into the top reasons to form an LLC.
1. Asset protection
It doesn’t take a catastrophic lawsuit to wipe out everything you own. Could you satisfy all your business obligations without tapping into personal reserves or losing personal assets? Incorporating takes this burden off your shoulders knowing that your personal assets cannot be targeted in the event of a business lawsuit.
2. Tax savings
By law, LLCs and corporations are entitled to many tax breaks. LLCs are unique because they can serve as a pass-through tax entity without the restrictions that are imposed on corporations. These savings alone can amount to thousands of dollars.
Here are a couple of ways to save money with your LLC:
- Business owners who have an LLC can deduct up to 20% of their business income before their tax rate is calculated.
- A Corporation or LLC can deduct the costs of operating a business: These include the actual cost of filing your new LLC, office equipment, office space, travel, lodging, meals, and even part of your car payment, to name just a few.
3. Easy to operate
Formed on the principle of the Freedom to Contract, owners need only agree among themselves on how to run the company, and courts will uphold that agreement. Even better, with an LLC, most states don’t require resolutions, amendments, meeting minutes or annual board meetings.
Establishing your LLC or Corporation will gain you the credibility of a legitimate business owner. The first step in attracting potential investors, is to ensure that you have properly established your business structure.
That said, even if you’re not looking for investors, adding “LLC” to your business name automatically makes you look legit, whether to potential new partners or your customers themselves. Not only that, but (in most US states), other businesses can’t use your business name once it’s attached to an LLC—ultimately helping you build your brand without the threat of competitors stealing your customers.
5. Flexible finances
An LLC only has to file taxes once per year. You can simply file your business LLC taxes alongside your personal taxes when you normally file. This is known as a “pass-through” tax option, and it keeps finances as simple as possible.
Time to set up your business
Every entrepreneur needs to formalize their business by filing an LLC. Not just because it adds credibility, makes it easier to get funding, and comes with a ton a tax perks…but also because it allows you to operate with peace of mind knowing you and your assets are protected.
While the information in this post can be a great starting point, Inc Authority can answer any additional questions you have. When you’re ready to form your business, we’ll set it up quickly online for free. Click here to get started!