There are many business owners who have chosen to start a Limited Liability Company (LLC) over other business entities. An LLC has several positive aspects of a sole proprietorship, partnership, or corporation without the drawbacks. Some of the positive aspects include tax benefits and liability protection.
State laws govern LLC but can vary from state to state but there are several important advantages that we will go over:
You Are In Charge:
If you ask most entrepreneurs, they will tell you they prefer to make their own way and run their own business without the assistance of others. As a single member or owner LLC, you are the sole owner of your business, make your own decisions, and not have to consult with or get approval from other partners in a partnership or a board of directors in a corporation.
You are like a sole proprietor, you own, run, and operate your business without the liability issues of a sole proprietor. If there are two more owners, you can enter into an agreement that lays out your responsibilities and roles allowing you to structure your business in a way that suits you best.
Less Personal Liability:
An LLC is seen as a legal entity separate from the individual members or owners and the owner is not personally liable for the LLC debts or legal liabilities. As the LLC owner, you may lose your capital contribution to the business, similar to shareholders. Unlike a sole proprietor or general partner, the LLC's legal obligations normally will not put the owner's personal assets at risk such as their home or personal bank account.
Like other organizations, you may be personally liable in some cases such as you personally guarantee a business debt or do not show proper care resulting in harm to a third party or breach your duties to the LLC.
Double Taxation & Pass-Through Deduction:
Basic corporations have to deal with the burden of double income taxation. A corporation's profits are taxed as income and shareholders must pay income taxes on dividends. LLCs have a tax procedure which will allow profits to be taxed only once for each member's individual income tax return. LLCs that qualify as a partnership or S Corporation may also receive similar tax procedures from the IRS.
With this business structure, an LLC owner may be able to deduct 20% of their business income with the 20% Pass-Through Deduction that is established under the Tax Cuts and Jobs Act.
Less Administrative Difficulties & Paperwork:
Unlike other corporate entities, establishing and managing an LLC is far less complicated and requires a lot less paperwork. An LLC registers by filing articles of organization with and paying a fee to the appropriate state office which is usually the Secretary of State. This filing usually has the LLC's name, location of its principal offices, names of the members, the planned duration of the business, and any other statutorily required information.
Other corporations must file articles of incorporation with the appropriate state division and abide by other statutory limits and requirements. After filing, a corporation must hold an organizational meet to elect their officers to determine authorized classes of shares then draft and enact bylaws that will detail the company's internal management. The board of directors meets on a regular basis to discuss and finalize business strategies, finances, and policies. They may call a special meeting when emergency action is needed. Corporations are also required to assemble an annual shareholders meeting and must file annual reports and pay yearly fees to retain their status. In most cases, these procedures do not apply to LLC although they often have annual fees and filing obligations.
Flexible Sharing Profits:
Businesses usually distribute profits based on the owner's capital contribution or their percentage of ownership. In a general partnership, the partners usually share the profits equally. Corporations have the discretion to pay dividends based on each stockholder's proportion of ownership interest. Under an LLC, members have the flexibility to decide how profits will be divided under the terms of their operating agreement. LLC members are not limited to their percentage of ownership but can decide to divide the profits in a different manner. For instance, a member can agree to take less than their given share in profits if another member agrees to put in more hours and handles the LLC's daily operations.
That said, LLCs may not be able to distribute profits under certain conditions such as when the distribution may harm the LLC's wealth or if the LLC's liabilities are equal to or greater than its assets. The IRS has other rules for special allowances that require distributions that are not based on the interest of ownership that reflects economic circumstances vs just wanting a tax advantage for the owners.
Yoel “Mo” Molina and I am a lifelong resident of Miami, Fl. I am a graduate of Miami Senior High, Class of 1992, Georgia Institute of Technology, B.S. 1997 and University of Maine School of Law, J.D. 2001. I have been practicing law in Miami Since 2001. I am a former training prosecutor in the Miami-Dade State Attorney’s Office. I have experience in jury trials, appeals, and administrative hearings. I have appeared before judges across the State. My experience ranges from civil litigation matters, collection matters, foreclosure, business and corporate, contracts, real estate, leases and employment matters..