As a small business owner, you want to protect your assets and create separation between your private and public or business finances. An LLC is a very popular way to provide legal security and protection for business owners, but it is so much more than that.
One of the most important parts of setting up a small business is to establish an LLC. But what exactly is an LLC, and is it better than other business structures, like a corporation?
This guide will answer the question, “What is an LLC for dummies?” We will break down exactly what it is and help you understand whether it is a good choice for your business.
What is an LLC?
An LLC is a limited liability company. It legally organizes a business, protecting personal property from financial or litigation risk. It is a way of structuring a business as a legal entity.
What an LLC Does
The most common thing an LLC does is separate the businesses’ assets from the business owner’s personal assets. It’s all in the name; it limits the liability to just the assets owned by the company, not the business owner’s personal assets.
Let’s explain this with an example.
If an LLC owns two real estate properties but defaults on its loans, the creditor can only go after any assets owned by the LLC. They cannot demand personal property from the business owner. They are separated legally, so the LLC must settle all debts, litigations, and other liabilities with assets it owns.
There are going to be caveats and other situations, but that is a simple example.
This is the most common benefit and why most people set one up. It’s essential to make sure that personal property is separated from the dealings of the business.
Let’s look at the most significant benefits of an LLC so you can see more clearly what it can do for your business.
Pros and Cons of an LLC
The easiest way to see what an LLC does is to look at the pros and cons. As advantageous as it is, an LLC isn’t the best idea for every single business.
Benefits of an LLC
Including asset protection, there are five main benefits of creating an LLC. It’s a way to organize and manage your business, and it offers tax flexibility, too.
An LLC protects members from personal liability due to anything the LLC does. This includes anything other members do on behalf of the business.
This means that creditors, clients, or customers cannot pursue personal assets such as financial accounts or real estate as a way to pay for business debts or dealings.
That is why it is called a limited liability company – it restricts how much members are liable for.
Another lesser-known benefit of an LLC is that it reserves your LLC’s name in your state. When you register your LLC at the state level, it prevents other businesses in your industry from using it.
This is a way of legally proving that your business actively uses the name without going through the time and expense of copyrighting it.
Less Red Tape
An LLC also involves less bureaucracy than other types of business structures. Setting one up is relatively quick and straightforward.
Since it has fewer compliance requirements than others (like corporations or partnerships), it is one of the quickest ways to set up a business.
An LLC provides more options when it comes to taxes, too. You can either choose to pay taxes as a corporation or a sole proprietorship.
Many LLC members enjoy the freedom to choose how to handle taxes. Often, members decide to allow business profits to go directly into their bank accounts. Then, they pay a tax on the profits on their personal federal income tax returns.
When they do it this way, filing taxes is easier than taxing your business at the corporate level.
Lots of people appreciate how easy it is to manage an LLC. Since all of the members have an equal say, it relieves the owner from sole decision-making.
LLCs also make it easy for small businesses to hire professional managers to run the business for them.
Drawbacks of an LLC
Depending on how you look at it, some people view these benefits as negatives.
Members are Self-Employed
The IRS taxes LLCs as partnerships by default, so members are self-employed and pay their own Social Security and Medicaid taxes.
Some business owners don’t want to pay self-employment tax; they prefer to pay taxes through a corporation.
It costs money to form an LLC, and there are ongoing fees related to it. This is why some people decide to just stick with a sole proprietorship.
Even though they don’t cost very much to create, even the most negligible fees might persuade a small business to refrain from establishing an LLC.
Difficult to Transfer Ownership
The other drawback of an LLC is that all members must vote on and agree to any ownership changes that the business owner wants to make.
Instead of just selling stock or shares, members must agree before adding new members or changing ownership.
This is only a negative experience if there are multiple members in the LLC or it is formed as a partnership and the partners don’t get along.
Who needs an LLC?
Now that you know what an LLC is, is it right for you? The best way to decide this is to discuss your business and financial situation with a CERTIFIED FINANCIAL PLANNER.
You might need an LLC if:
- You run a business as a sole proprietor
- Your business has any debts
- Your business is at risk for litigation
- You run your company with a partner or a group of people
Of course, this list isn’t exhaustive. It’s best to speak with an experienced professional who can look at how your business is organized and help you decide which way to set it up further.
Should you start an LLC? Contact us.
Knowing what an LLC is for dummies doesn’t take your specific needs into account. Now that you know the basics, it’s time to figure out if it makes sense for your small business.
If you want to discuss the benefits further, contact a financial advisor in Green Bay, WI, a financial advisor in Eau Claire, WI, or a financial advisor in La Cross, WI. They will look at how your business is structured and whether an LLC is the best course of action for you.