Many entrepreneurs launch their businesses as sole proprietorships rather than limited liability companies (LLC). Why did they want this entity? Creating a sole proprietorship enables entrepreneurs to have complete ownership of their companies. It is often inexpensive to establish and needs minimal documentation to get underway.
The disadvantage is that sole proprietorships do not shield shareholders from responsibility. If anything unforeseeable happened to the corporation, such as a litigation, the owner will be kept entirely liable.
What if you don’t like the tone of that? The positive news is that you will still adjust your original company formation as a sole proprietor. Depending on the business and offerings, you should file as an organization, alliance, or limited liability company (LLC). One of the most common of the above three entities is an LLC, so let’s take a look at why this structure suitable for (almost) any company.
Limited liability companies provide business owners with liability protection
When you form an LLC, you are designating your company as a distinct, legal body. This distinction provides a limited liability shield. Your personal assets are isolated and safeguarded from the assets of the company.
Let us return to the case of a sole proprietorship that is facing a complaint. Since the client does not have liabilities insurance by their entity, their personal belongings are at risk. However, if an LLC was presented with litigation papers, it would have little effect on the owner’s personal possessions, and things such as vehicles and houses would be secure. This is due to liability insurance, which forbids the holders of an LLC from being kept entirely liable for the company’s liabilities.
Choose the way an LLC is taxed
All is charged on a sole proprietorship. This is due to the fact that their company is not deemed an independent body. Limited liability corporations, on the other hand, may be taxed as a single proprietorship or as a separate company. According to the Internal Revenue Service, LLCs are often taxed as a partnership or business.
Another well-known taxing entity? Corporations with the letter S.
S Corporations begin as LLCs who apply to the IRS for S Corp status. They are referred to as a “pass-through” tax agency. What does this mean for business owners? Income, costs, refunds, and credits are passed across the entity level until you have applied for S Corp status. They are deposited directly into the shareholders’ personal tax returns, enabling the corporation to escape double taxation.
Limited liability companies are flexible entities
The formation of a limited liability company has a great deal of versatility!
Unlike a typical corporation, which are more structured, LLCs are subject to less corporate regulations. LLCs, for example, are not expected to host shareholder meetings or to form a board of directors. LLCs can draft written operating agreements and keep meeting minutes, but the organization is subject to modification.
There are other LLC structures to incorporate within
If you have more than an owner or member of your LLC, then you might want to suggest integrating under one of the three systems mentioned below.
Single member: If you have one member (owner) operating the business, this entity is perfect.
Member controlled: All participants are handled equally in a member managed LLC. Any individual is responsible for the same number of roles and obligations as the others. If you operate a company in which each participant needs to be similarly active, form a member-managed LLC.
Manager controlled LLC: This organization is ideal for participants who are concerned with their ability to operate the LLC properly. A board of managers is chosen in a manager run LLC to control the business’s direction and activity.
It’s relatively inexpensive
That’s correct! Entrepreneurs often establish sole proprietorships because they are less expensive, but LLC formations are also less lucrative.
The national average cost of forming is $500, but it may be less depending on your state of formation. Inquire with your state’s Secretary of State about the application requirements and costs for establishing an LLC and incorporating as this kind of company structure.