If you’re starting a business, you may be considering forming a limited liability company (LLC). You should know that LLCs offer many benefits to business owners, which is why many of the more successful US companies have chosen this business structure.
What is an LLC?
An LLC is an increasingly popular business structure for startups, offering liability protection for ownership and greater flexibility than a corporation, particularly in terms of taxes. The LLC itself does not pay taxes. As a “pass-through” entity, income passes through the business to the owner or owners, who report it on their personal tax returns. An LLC is created by filing paperwork with your state, and nominal fees are involved.
An LLC offers its owner or owners, who are called members, considerable flexibility in terms of management. You can choose your management and operational structure and decide how you want to be taxed. Your LLC can have a single member or multiple members, all of whom have personal liability protection, meaning your personal assets are not at risk if you cannot pay business debts or are involved in a lawsuit.
Benefits of Forming an LLC
As mentioned, LLCs have many benefits. These include:
An LLC is simple to form, requiring much less paperwork than a corporation. You only need to file articles of organization and have an operating agreement to define ownership and roles and responsibilities. There are no annual meeting or reporting requirements, as with a corporation, and you don’t need a board of directors. In some states, however, you do have to file an annual report for an LLC. It’s also less expensive to form an LLC. Corporations and partnerships are best formed with the assistance of an attorney, which is expensive. It is a good idea, however, to have your LLC’s operating agreement reviewed by an attorney. Corporations also pay fees for their required annual filings.
In an LLC, you can be the only owner just like a sole proprietorship so that you have full control of the business. If you have more than one owner, you can structure the management any way you choose with your operating agreement. You don’t have to answer to a board of directors or anyone else. You have more freedom to make decisions than you do in another type of business structure, other than a sole proprietorship.
3. Limited Personal Liability
Unlike a sole proprietorship, an LLC is considered a legal entity that is separate from you, the owner. Just as in a corporation, your personal assets are protected because you’re not personally liable for the company’s debts or legal liabilities. In a sole proprietorship or general partnership, your personal assets such as your home are at risk in the event of liabilities. There are some instances in which an LLC owner, however, could have personal risk. For example, if you’re asked to personally guarantee a business loan, you’re personally liable for the debt.
4. Tax Advantages
An LLC is considered a “pass-through” entity, meaning income passes through the business to the owners for tax purposes. The LLC is not a taxable entity, so all income is reported on the tax return of the owner or owners and taxed at their personal income tax rate. In the case of corporations, the corporation is taxed as well as the dividends shareholders receive, which is sometimes referred to as double taxation. LLC owners also may be eligible for the 20% pass-through deduction that was part of the Tax Cuts and Jobs Act, meaning they can deduct up to 20% of business income. An LLC, however, can choose to be taxed as a corporation or partnership if it is deemed to be beneficial for the company.
5. Profit-Sharing Flexibility
Most businesses split profits based on the capital contributions of owners. In a partnership, profits are generally divided equally. Corporations pay dividends based on the ownership percentage of the shareholders. In an LLC, in the operating agreement the owners can specify any profit-sharing plan that they choose. One owner can take a percentage share of profits greater than their ownership interest, while other owners take less. This may be done in a case in which one owner is more involved in the operations of the business than others.
An LLC has the advantage of having more credibility to customers and vendors than a sole proprietorship. As a matter of perception, people tend to see an LLC as a more established company, as opposed to a one-person show.
Well Known LLC Companies
LLC is the most common type of business entity in the US, so of course many of the country’s largest and most successful companies have chosen that structure. You may have heard of:
Anheuser-Busch Companies, LLC, a subsidiary of Anheuser-Busch InBev, has been brewing since 1852 and brings in over $15 billion in annual revenue. Who doesn’t know Budweiser or Rolling Rock?
Blockbuster LLC was a popular chain of video and DVD rental stores founded in 1985. They are now a subsidiary of Dish Network.
3. Westinghouse Electric Company
Westinghouse Electric Company LLC is a nuclear power company founded in 1999. They currently employ over 9000 people.
Amazon.com Services LLC, a subsidiary of Amazon.com, was founded in 2002 and is in the electronics and appliances sector. It brings in nearly $1 billion annually.
Hertz Vehicles LLC is a car rental company and part of the Hertz family of companies.
Sony Interactive Entertainment LLC is a subsidiary of Sony, Inc. and is the video game and digital entertainment arm of the company.
IBM Credit LLC is a subsidiary of IBM and finances the purchases of IBM and other products.
Google LLC is a subsidiary of Alphabet, Inc., and is the global search giant we use every day.
As you can see, many successful companies have embraced the LLC business structure because of its many benefits. LLC benefits are also great for small businesses, which is why LLCs are so popular.