There are numerous different business structures that entrepreneurs can use when starting a new company. From sole proprietorships and partnerships to nonprofit organizations, there are structures that work for different business concepts and personal situations. People often start with the simplest business structure that would work for their business model and scale up as the company grows.
Limited liability corporations (LLCs) are a popular choice for those starting their first business or expanding an existing, small company previously held as a partnership or sole proprietorship. Why are LLCs one of the most popular forms for modern businesses?
As the name implies, they protect you from liability
If you develop a product and sell thousands of individual units, only to later face defect claims that result in a recall or a lawsuit, the company could go under. You could lose whatever you invested in the company.
Even worse, your personal property and even your future income could be at risk. An LLC creates a layer of legal separation between you and the business, which potentially means you don’t have to worry about your personal assets being vulnerable if customers, employees or even other companies try to take your business to court. So long as you maintain separate finances without commingling, your assets and future income usually won’t be at risk over an LLC’s losses.
There are tax advantages as well
When companies make money, they have to report that revenue and pay the appropriate taxes on the income generated. There are tax rules that benefit businesses and others that protect individuals. An LLC offers the best of both worlds.
Members of the LLC can report business revenue as personal income, allowing them to use deductions and tax credits not available to companies. What the company reinvests in infrastructure or operations won’t be subject to taxation, either. Depending on how you balance your budget and reinvest in the company, an LLC could shield you from a lot of potential tax expenses.
If you intend to start an LLC, it is important that you have the right guidance, as mistakes might lead to a loss of some of the financial and legal benefits that come from creating an LLC. Learning about the different kinds of business structures can help you start your new business with the best protections given your business plan.