7 Reasons Why an LLC is a Right Structure for Your Startup
The business structure you adopt directly impacts your startup right from daily operations, filing taxes, your fundraising or capital financing ability, necessary paperwork to file, all the way to defining your personal liability. You should choose a business structure that offers the optimal blend of legal securities and incentives from the state. If you are an early-stage startup or an enterprise, an LLC business structure could be the best fit for you.
A limited liability company (LLC) implies a business structure for private enterprises that incorporates the characteristics of partnerships and corporations. While retaining the limited liability status of corporations, limited liability firms benefit from the flexibility and flow-through taxation of partnerships and sole proprietorships.
Check out the ‘How to start an LLC in California‘ guide if you want to start your own startup or a business in the state.
Top 7 Reasons Why Forming an LLC is a Great Choice for Your Startup
Here are some key reasons why limited liability companies are a popular choice for startups:
1. Taxation-related benefits
Depending on how the enterprise gets formed and the number of employees and investors involved, a small startup often prefers forming an LLC to avoid double taxation and accommodate multiple classes of stock if necessary. When an entrepreneur adopts a traditional C-Corporation business structure, the corporation and the owner are often taxed separately during the financial year. But since it is taxed more like a sole proprietorship, an LLC precludes this.
LLC’s get taxed in such a way that the income and expenses are passed through to each stakeholder’s tax filing and are taxed at the owner’s rate of income tax. Thus, an LLC does not have to pay federal corporate income tax.
2. Reduced paperwork and documentation
Corporate entities also offer limited liability, but they must adhere to specific standards that may not be practical for a small, informal enterprise. Corporations, for example, are required to hold annual shareholder meetings, file annual reports, and pay state fees on a yearly basis. They usually have a lot of paperwork to keep track of.
On the other hand, LLCs are not needed to hold annual meetings and are not mandated to maintain extensive documents. Also, LLCs are exempt from filing yearly reports in many states.
3. Ownership and management flexibility
An LLC gets the liberty to select from a multitude of tax treatment options. They can choose between partnerships, S corporations, sole proprietorships, or C corporations as their tax structure. It gives the corporation the ability to be recognized as a flow-through entity. A flow-through entity’s revenue is recorded as the income of its owners. It means that LLC owners can avoid paying double taxes.
Furthermore, unlike corporations, which are obliged to nominate executives and a board of directors, an LLC’s management structures offer more flexibility.
4. Easy and quick registration process
Since it is quicker and more convenient to register, an LLC is an incredible business structure for a startup. Without the help of an attorney, you can accomplish the registration process. For instance, if you have registered an LLC in Texas, you receive an Employer ID Number and can open business bank accounts, and just like that, you’re in business in no time at all.
Also, an LLC has a pretty affordable filing charge. Moreover, the LLC’s owner enjoys full authority to sign contracts on behalf of the company. Further, as an inventor, you are free to assign your patents to the LLC.
Learn how to register a UK LLP and open a bank account quickly and easily.
5. Limited personal liability
The primary benefit of LLCs is that they protect members from personal liability. It implies that if the LLC slips into debt or faces prosecution, the owner’s personal financial assets aren’t affected. Such protection can’t be offered in the case of sole proprietorships or general partnerships.
The charging order is another associated benefit of LLC. If one of the partners has personal debts or owes a legal judgment, their creditors may go for personal assets, including a stake in any business. A charging order places a lien on that person’s LLC income, which safeguards the profits and ownership interests of the other members and lets the indebted member retain their participation in the firm without granting the creditor any authority of business operation.
6. More flexibility in profit sharing and distribution
Profits get distributed to LLC owners in several diverse ways, and they aren’t needed to be distributed evenly or shared according to shareholding proportions. Two individuals may have equal stakes in an LLC, but they may consent that one of them will earn a more considerable portion of the profits because he induced more investment or brought more significant value to the table during the founding stages.
On the contrary, it becomes mandatory for corporations to disperse profits to shareholders in proportion to the amount and types of shareholdings that they own.
7. Quicker amendment and decision-making power
Another advantage of the LLC structure for a startup is that it requires little persistent supervision once it gets established. Perhaps more importantly, it’s simple to add new partners or sell a stake in the business to someone else. You can scale your business faster if you get this liberty to onboard new investors and advisors more efficiently.
It is more permissive than the C-Corporate business structure, which requires board actions to be agreed upon and documented, which takes hours. Thus, unlike other corporate systems, LLCs experience fewer constraints on many operational matters.
Conclusion
Many new enterprises benefit from an LLC’s flexible and scalable business structure. Although both corporate entities and LLCs have limited personal liability, LLC owners can also benefit from tax advantages, managerial flexibility, and lower documentation and auditing requirements.
Author Bio:
Mark Horwitz
Matt Horwitz is the founder of LLC University, a website that teaches people how to form LLCs. Matt is the leading authority in LLC education and is featured in CNBC, Yahoo Finance, Entrepreneur Magazine, and US Chamber of Commerce. Matt holds a Bachelor’s Degree in business from Drexel University with a concentration in business law. LLC University®, established in 2010, was the first company to create free LLC courses in all 50 states.
