Forming a limited liability company or LLC may seem like a serious step towards formalizing your business venture, but if you’re an investor or run a small business, incorporating your business as an LLC can offer valuable financial protections. And what’s more, it’s a very simple process.
Individual Versus Corporate
One of the primary reasons business owners turn to the LLC format is that it combines the best features of an individual operation and corporate asset protection. Simply put, LLCs are very flexible – though you’ll need articles of incorporation and a few basic forms of documentation, how you operate an LLC is ultimately up to you as an individual. At the same time, forming an LLC allows you to separate your personal and professional assets. As such, your professional debts can’t impact your personal finances.
Larger businesses require a more organized business structure than LLCs; you’ll need a business plan that attracts investors, that will help you get a loan, and that can guide your company’s development. Meanwhile, an LLC may not really be a company at all. In many cases, it does little more than improve your position relative to taxation and divide your finance into the professional and the personal.
Built For Your Budget
LLCs are designed for small and medium-sized businesses, which makes them a budget option. In Texas, for example, the state filing fee for an LLC is $300 and your business can be established in a week. Comparatively, to form a professional association or limited partnership is a $750 filing fee. But the financial savings associated with an LLC is what really makes it a budget-friendly structure.
Dividing Debts And Assets
The structure of an LLC is such that you have two different financial pools: one for your business and one for your personal life. This is true, even if your LLC is protecting your investments or real estate holdings, rather than a traditional business.
What does that mean? With an LLC, if you suffer serious losses on a brokerage account, for example, your personal finances aren’t vulnerable to that debt. At the same time, if you are running a small business under the banner of your LLC, it can make it much easier to write off business expenses than if you simply continued to operate as self-employed, sans incorporation.
If you’ve ever paid self-employment taxes, you know that they can be burdensome; right now, the rate is 15.3% of your income, as it needs to cover both your share and your employer’s share – but an LLC can help with that. LLCs don’t pay direct tax, but are taxed through a process known as “pass-through” taxation. Pass-through taxation applies to all member partners of an LLC and the owner is considered an employee, which can mean serious tax savings.
Forming an LLC isn’t right for everyone, but for anyone with a small business or a lot of investments, incorporating as an LLC can provide valuable structural supports. Though you don’t need the formal guidelines of an S-Corp or C-Corp, the financial benefits of pass-through taxation and asset division can put you in a more secure position relative than if you were to continue operating as an unincorporated individual.