When you first start a business, part of the process typically involves choosing a corporate structure. As you begin reviewing your options, you’ll quickly learn there are many from which to choose.
It’s important to conduct thorough research and carefully consider your goals when deciding which structure is ideal for your business. That said, many business owners have begun choosing the LLC (limited liability company) structure in increasing numbers.
This may be an option you should strongly consider. Keep reading to learn more. The following points will help you better understand which types of businesses benefit most from becoming LLCs.
What Type of Small Businesses Should be LLCs?
Almost all businesses can theoretically qualify to become LLCs. The nature of the services or products you offer may not necessarily influence whether you can start an LLC or not.
However, you should consider your business’ current size when deciding whether to form an LLC. Perhaps more importantly, you should consider future plans.
An LLC offers many protections a corporation also offers. That said, there are key differences between the two.
For example, the owners of corporations essentially own shares of stocks in their businesses. LLC owners, who’ve invested in the business already, own equity in the business’ assets.
In other words, if your business is likely to reach the point where you’ll wish to sell shares of stock to members of the public, it will need to be a corporation in order for you to do so.
That may not be a factor influencing your decision if your business has only a few owners who are likely to continue running it with you for an indefinite period of time. If you don’t have any intentions of selling stock in the future, you may prefer establishing an LLC over a corporation, as the process involved in doing so is much easier.
One of the key benefits an LLC offers its owners is protection from liability if the business sustains losses. In other words, if your business faces debt, but it’s an LLC, your personal assets can’t be seized.
That’s why many entrepreneurs choose to establish LLCs when starting businesses where the risk of sustaining losses is relatively high. Knowing their assets are protected offers them substantial peace of mind.
While you may hope to make it a full-time job in the future, right now, running your business may be a side job. If that’s the case, you might not have much time to spend on officially setting up your business when you choose a corporate structure.
This is another reason you may consider starting an LLC. Although it is important to familiarize yourself with the steps that establishing an LLC involves, such as drafting an official LLC operating agreement, you should know that starting an LLC is typically a simple process compared to other corporate structures. This may be ideal if you have limited free time due to already having another job.
Businesses on a Budget
As a small business owner, it’s highly likely you’ve invested some of your personal income and assets into funding your business. You may also continue to do so in the future.
Research the tax benefits of forming an LLC if so. With some types of business structures, profits are first taxed before being distributed to owners, then taxed once again when owners file individual returns.
LLCs are different. When you form an LLC, profits are only taxed when you file your return, ensuring minimal taxation. That may be an appealing quality of the LLC structure if you’re on a tight budget and want to protect your personal income from higher taxation.
That said, in some cases, the costs of running an LLC prevent the tax benefits from yielding any major advantage. Once more, you should conduct thorough research and review your financial situation when deciding if an LLC is the best choice. It’s also worth noting that, compared to other structures, the LLC structure is relatively new. As a result, the tax benefits of an LLC vary to some degree from one state to another.
The main point to remember is that there’s no one corporate structure that’s right for all businesses. The ideal structure for a small business may not be ideal for a thriving enterprise. Hopefully, though, these points have helped you gain a clearer sense of whether an LLC structure is suited to your business.
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