One of the first steps of starting your own business is selecting the structure for that business. It is important that you choose the right business structure for your situation because your business structure can affect taxes, your control over your business, the amount of paperwork your business must complete and the amount of personal liability you could be exposed to.
A limited liability company (LLC) structure is a popular option for many entrepreneurs. This is easy to understand because an LLC utilizes benefits of both the corporation and partnership structures.
Protection from personal liability
Similar to a corporation, an LLC can protect you from personal liability. This means that your personal assets like your house or your car are kept legally separate from your business assets. This also means that if your business faces a lawsuit or bankruptcy, you will not risk losing your personal assets.
Similar to a partnership, an LLC allows profits and losses to pass down through personal income. This allows you to avoid corporate taxes, though you must pay self-employment taxes. However, LLCs are flexible, so you may instead choose to be taxed as an S corporation, which would only apply self-employment taxes to salaries and wages but not distributions.
Unlike a corporation, an LLC involves few ongoing compliance requirements. For example, you need not create a board of directors or submit annual reports. You will also have less paperwork to complete to get an LLC started than to get a corporation started.
Although an LLC can have many benefits, it is not the best choice for every business. It is important to understand all of your business structure options, so you can make the best choice for your situation.