10 Reasons to Consider Forming an LLC
If you’re starting a business, or already have a growing small business, you might be wondering about the different business structures available to you. This is an important decision, because it will affect various aspects of your finances, taxes, and legal obligations. Consultation with a skilled business attorney is key to identifying the solutions that are right for your business.
However, it is important to note that you are not limited to forming either partnership or corporation. A third option exists, that basically functions as a hybrid of these two options. A Limited Liability Company (LLC) might be right for you, assuming you are legally eligible to form one (certain businesses are not eligible for an LLC, such as banking, insurance, trust companies, doctors, lawyers, real estate brokers, and other professionals whose services are rendered pursuant to a license).
Assuming you’re eligible to form an LLC, why would you? This is an issue to discuss in depth with one of our business attorneys, but generally speaking there are 10 primary benefits to an LLC:
- sole proprietors who form an LLC are not required to file additional tax returns (just a Schedule C)
- limited liability protection for all members
- default pass-through tax treatment
- members are not held to strict restrictions (corporations and non-resident aliens can be members, for example)
- local and state reporting requirements are generally much more simple
- an LLC requires less upkeep and maintenance than a typical corporation
- greater flexibility with regard to structure and management
- greater flexibility with regard to income and loss distribution
- greater flexibility with alternate tax elections
- greater flexibility with regard to voting and profit participation rights of members
LLCs do come along with some disadvantages. For example, many accountants struggle with the laws surrounding an LLC. Also, in California an LLC is subject to an additional tax imposed by the California Franchise Tax Board. If your business revenue will exceed $500,000 per year, an LLC might not be the most advantageous tax structure.
The final drawback of an LLC is that, in order to reap many of its advantages, the LLC must be properly formed. Many business owners have made the mistake of utilizing online options to form their own LLCs, and have lost some of the advantages they expected. That’s why working closely with your business attorney is key to the process of forming an LLC. Give us a call, and we can help you decide whether the LLC structure is right for your business.