Choosing the structure of your business is necessary before registering it with the state. A very common business structure is a limited liability company (LLC). An LLC offers great flexibility in management, taxation advantages, and liability limitations. Even though it’s considered most appropriate for small businesses, companies of any size can become LLCs.
To expand your understanding of LLCs and how they can grow your business, read on.
Defining An LLC And How It’s Formed
LLC is short for limited liability company. The purpose of an LLC is to safeguard the personal assets of business owners in case a lawsuit arises. This business structure has some of the features of a partnership, sole proprietorship, and corporation. However, its operations are more simplified than those of these other structures.
LLCs don’t require corporate record keeping, board meetings, or other time-consuming paperwork. In addition, LLC members get to decide how the business operates, including ownership, management, and voting processes. These decisions are compiled into an LLC operating agreement, which isn’t mandatory in many states but can facilitate the entity’s success.
A variation of an LLC is a professional limited liability company (PLLC). Some states restrict licensed professionals, such as architects and lawyers, from forming LLCs. However, PLLCs are an alternative method for professionals who want to protect their personal assets in case of a lawsuit.
To form an LLC, you have to file articles of organization with your state. Articles of organization is a legal document that outlines the LLC’s physical location, members, and registered agent. The registered agent (a person or company) receives legal documents and correspondence from the state on your behalf. Make sure to know who offers the best LLC services in your area. Also, the requirements can vary from state to state.
Ways An LLC Can Grow Your Business
Settling for an LLC structure comes with numerous benefits that promote the growth of your business. While forming an LLC may differ across states, the benefits of this business entity prevail. These benefits include tax advantages, limitation of personal liability, efficiency due to minimal paperwork, and management flexibility. Each of these benefits is discussed below.
- It Provides You With Tax Advantages
An LLC can be taxed as a partnership, corporation, or sole proprietorship. This is because it isn’t attached to any specified federal tax classifications. This tax flexibility lets you determine the tax approach that benefits your business the most.
Additionally, LLCs aren’t subject to double taxation, unlike corporations. For corporations, the first tax is imposed on the corporation’s annual profits, and the second tax is set on the dividends. With an LLC, you can choose to be taxed as a partnership or a sole proprietorship to prevent double taxation. In other words, the business income is not subject to taxes. Instead, members pay taxes themselves based on their individual income. This is called ‘pass-through taxation.’
With the introduction of the Tax Cuts and Jobs Act of 2017, pass-through, and generally noncorporate, taxpayers can request a deduction of up to 20% of their qualified business income.
These tax advantages help you save on costs and channel the saved funds toward other business processes to improve efficiency.
- It Limits Your Personal Liability
The primary reason for the popularity of LLCs is their ability to limit the personal liability of business owners. This cushions their personal assets by preventing them from being held liable for business debts and practices.
For instance, assume an employee has been charged with breaching environmental regulations while in your company. Your business may be charged legally and then ordered to pay for any damages. As an investor, you will be held liable for them but only with the amount of money you’ve invested in the company. Your share of the loss should not go beyond that amount. In other words, you’re sure your personal assets are safe.
Consequently, you may choose to utilize your personal assets to fund your business in case you encounter financial constraints after paying damages. Thus, limited personal liability safeguards not only your personal assets but also your business from stalling.
- It Increases Efficiency Due To Minimal Paperwork
Unlike corporations, the maintenance and governance of an LLC are straightforward. As mentioned earlier, the LLC members decide upon the management, ownership, and voting among themselves.
Additionally, LLCs don’t have to host annual board meetings or keep extensive records. Less paperwork can enhance the efficiency of business operations. Consequently, this promotes productivity and increases morale, which are crucial to the growth of your business.
- It Facilitates Management Flexibility
An LLC doesn’t need to have a board of directors. This promotes independence and flexibility in management. LLCs can either be managed by the members or a manager. Member-managed LLCs require the active participation of the members in the day-to-day operations.
In contrast, manager-led LLCs are run by a manager, whom the members usually appoint for their excellent business sense. The manager can be a member or not. Under this arrangement, the members act as passive investors. This flexibility promotes efficiency within your business and competitiveness within your industry. You don’t have to consult a board of directors before making decisions. This saves time and promotes efficiency in terms of organizational output. Also, this makes it easy for the business to adapt to change quickly. The more changes you make, the more you learn about your business, and the greater your competitive advantage becomes. The outcome of management flexibility is business growth.
An LLC is a popular business structure that limits the personal liability of the owners in case a company experiences legal issues. Besides safeguarding your personal assets, an LLC can grow your business because it mainly offers management flexibility, broader taxation options, and tax advantages, among others.
Operating under an LLC structure ensures the kind of management you’ve chosen to adopt is best for the business. You are also given more options on how you will be taxed. The tax advantages help you save costs and improve your business’s efficiency. Furthermore, it involves less paperwork, which also helps increase efficiency, allowing your business to thrive.