Starting a business is an exciting endeavor, but that excitement can quickly become diminished when you realize just how much work goes into creating a legal entity for your business.
One option is forming an LLC. It’s important to get help from a professional law firm to ensure everything is completed properly, but having at least a simple understanding of the pros and cons of forming an LLC is a good idea.
Here are two convincing reasons to start an LLC, and one consideration that may cause you to look for other business formation options.
Limited Personal Liability
An LLC is an option for businesses of all sizes. Even businesses with a sole proprietor can benefit from an LLC because it provides you and your family with limited or no personal liability.
With an LLC, your personal finances are protected should something happen. For example, if you fix HVAC systems, but something goes wrong with the repair and damages your client’s home, your business is on the hook should you find yourself in court—not your personal income and assets. That’s extremely important if your business provides a product or service that could potentially cause hardship for your clients.
Easier to Form Than Other Business Arrangements
When getting into business for the first time, it can be mind boggling just how many business arrangements are available.
Your choices include:
- Sole Proprietorship: Features a single proprietor with little or no legal involvement in its establishment
- Limited Liability Company (LLC): There’s no liability between partners, or personal responsibility for business operations
- C-Corporation: With this agreement, profits are taxed separately from its owners
- S-Corporation: This type of corporation offers investment opportunities and perpetual existence, regardless of its founders’ involvement in the future
An LLC is among the easiest to establish with just a few steps, whereas some of the other options include multiple steps, more involvement from a legal professional, and mountains of paperwork.
The biggest downfall of forming an LLC compared to some other business arrangements involves taxes. You may end up paying a lot more than you thought.
The LLC doesn’t pay taxes directly. Instead, the net income of the business is taxed through the owner or owners of the business. That means an LLC doesn’t benefit from the same tax rates and deductions that corporations do.
In addition, because you’re self-employed, you’ll be responsible for paying taxes that a traditional business would normally cover, like Medicare and Social Security.
Because there are so many business formation options, and so many tax and income considerations to take into account, it really is a good idea to seek the help of a professional. An accountant or a lawyer can help you decide if an LLC is the right way to go for your business.