When you start your own company you have several different legal structures to choose from. Most people who start out on their own choose to just be a sole proprietor. If you want to call your business something other than your name, then you need to file a Doing Business As (DBA) structure. If you and a partner are starting a business, then you have to file a partnership.
One of the smart moves to make is to use a legal structure that makes your business into its own legal entity. If your business gets sued or is forced to close because of a scandal, then your personal assets are protected. The most common forms of legal entities are S corporations and Limited Liability Companies (LLC). The LLC is growing in popularity, and there are several good reasons why.
<h3>What Is An LLC?</h3>
A <a href=”https://www.legalzoom.com/knowledge/limited-liability-company/topic/limited-liability-company”>Limited Liability Company (LLC)</a>is a legal business structure that allows your business to be considered its own legal entity. When people want to sue your business, they would sue the LLC and leave your personal assets out of it. If your business goes bankrupt, then it is the LLC that files bankruptcy and not the owners. This is very similar to an S corporation, but there are several important differences that cause people to choose an LLC over an S corporation.
<h3>Flexible Ownership Options</h3>
An S corporation has very strict ownership requirements such as the number of owners allowed and what kinds of entities can have ownership. With an LLC, the owner can be an individual or a group of investors. An LLC allows any type of individual or legal entity to have ownership in the company, and there are no restrictions on how many owners an LLC can have.
<h3>It Is Less Formal</h3>
An S corporation structure requires comprehensive incorporation articles, regular board meetings, board elections and a variety of other formalities that can be expensive and time consuming. An LLC has none of these requirements, which makes being an owner of an LLC easier. There are also special tax forms that need to be filed each year for an S corporation that the owners of an LLC never have to worry about.
<h3>Taxes Are Easier</h3>
An S corporation has what is known as a two-tiered tax system where revenue is taxed at the corporate level and at the owner level. With an LLC, <a href=”https://www.sba.gov/blogs/6-things-you-need-know-about-your-tax-responsibilities-llc”>profits or losses are claimed on the owner’s individual and personal tax filings</a>. In most states, the LLC itself only has to file an informational return that does not require any kind of income tax payment.
If you want to run your business as you see fit, then it is important to choose the right legal structure. Many people like the versatility and flexibility offered by an LLC, as well as the simplicity it offers when it comes to regulations and tax filings.
Jim Treebold is a North Carolina based writer. He lives by the mantra of “Learn 1 new thing each day”! Jim loves to write, read, pedal around on his electric bike and dream of big things. Drop him a line if you like his writing, he loves hearing from his readers!