A limited liability company (LLC) is one of the most popular types of companies to set up, and it’s for good reasons. LLCs offer many advantages to business owners, especially limited liability protection. This article will explain what an LLC is and the benefits it brings.
What Is A Limited Liability Company?
It is a legal structure for businesses that protects shareholders from personal liability for corporate debts and liabilities. The corporation assumes a separate legal identity distinct from its shareholders. The owners won’t be personally liable for any corporate debts and judgments. You should also know that can you operate a franchise as an LLC? Banks and other creditors can not go after the owners’ personal assets in case of disputes. The only exception is if the owners are proven to have committed fraud.
Reasons To Form An LLC
1. Personal liability protection
The primary benefit of an LLC is the protection it offers to investors. Investors are free to take business risks by forming an LLC. Their personal assets won’t be affected if the business goes bankrupt or is sued for damages. This type of personal protection isn’t available for sole proprietors and general partnerships.
The exception for this protection is if the owners are proven to have committed fraud. In that case, a court can pierce the corporate veil and permit creditors to go after owners’ assets. The protection can also be pierced if the owners mix personal and business assets; it’s why most jurisdictions require LLCs to have distinct bank accounts.
It’s relatively easy to set up a limited company. The documentation and filing requirements are less stringent than other corporate structures. Most jurisdictions ask for a small fee to process the application. You can set up a limited company or go through a professional service provider, e.g., Osome. The latter takes away a lot of stress and frees up time to focus on your business.
LLCs can get exemptions from having a board of directors and holding regular shareholder meetings. This exemption gives the owners more time to focus on growing their company.
3. Boosts credibility
Limited liability companies look more credible to customers and fellow businesses. Many people form businesses every day, and customers and vendors are wary of who to trust. An LLC registration gives your business a tacit stamp of approval with customers and suppliers because they know you have legal backing. In case of disputes, third parties are sure that they can head to courts to settle them.
4. Easy transfer of ownership
It’s very easy to transfer shares in an LLC to third parties. For example, you can easily transfer shares to friends and family members. It’s also easy to sell shares to investors to raise money.
Easy transfer of ownership is why external investors prefer to invest in limited companies. An LLC is the ideal choice if you plan to raise outside capital.
5. Tax flexibility
It’s easy to file and optimize taxes for LLCs. You can choose if the LLC will be taxed as a separate corporation or a pass-through entity whose taxes flow to each owner’s personal tax return.
Pass-through taxation means avoiding double taxation. Owners pay taxes on the company’s profits or deduct losses alongside their personal income. Otherwise, the corporation will be taxed first, and the owners will be taxed again on the income they receive from it.
Owners can deduct legitimate business expenses to reduce tax liability for their LLC.
We have explained how an LLC works and the benefits it offers to entrepreneurs. LLCs are the best option for starting new companies. They are easy to set up, and you can do that yourself or through a professional business management firm.