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Why Is It Popular To Structure A Start-up Business As An Llc?
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An LLC offers many advantages which make it a popular choice for business owners. It has become a common trend these days to structure many start-up businesses as Limited Liability Companies (LLCs). The reasons are strong and practical. An LLC combines certain positive aspects of a sole proprietorship, general partnership, and corporation while doing away with some of the shortcomings of these organizations. Though LLCs are subject to different state laws, they are generally synonymous with providing following benefits to start-up businesses-
Your Assets are Protected- LLCs protect their owners through minimum liability which means generally they can’t be held responsible in person for financial obligations and liabilities of LLC. So, if they have any business debts, creditors can’t recover them through the owners’ personal assets such as saving accounts and house. On the contrary, in a in a sole proprietorship or general partnership, the creditors can chase the personal assets to reclaim their money.
Your Credibility Increases- When you set up your business as an LLC, it gives the much needed impression that you are serious about your business. It enhances your credibility with prospective customers, your employees, vendors and partners. They put their trust in you by continuing their association with you as they believe you are formally committed to your business now.
Tax Advantages- An LLC is generally not liable to pay taxes at the business level. Whether business generates profit or loss, it is ‘passed through’ to owners and given account of on their personal income tax returns. If any tax is due, it is paid at the personal level.
Fewer Consent Requirements- As compared to S corporations and C corporations, LLCs are subject to limited state-enforced annual requirements and ongoing formalities.
Freedom to Structure the Business- LLCs enjoy more flexibility in terms of having the freedom to choose the structure of their business as compared to other business organizations. They can opt for any organizational structure decided by the company owners. LLCs have the freedom to be managed by the owners or members or by managers. This is a great advantage over corporations which have a board of directors to supervise the important business decisions of the company and employees who handle day-to-day events.
Less Restrictions- LLCs face fewer restrictions as compared to S corporations when it comes to who can own an LLC or if an LLC can have many owners.
Flexible Profit Sharing- When it comes to profit sharing, most business organizations distribute profits on the basis of an owner’s capital contribution or percentage of ownership interest. In case of a general partnership, profits are generally shared equally among partners. In corporations, dividends are distributed on the basis of each stockholder’s percentage of ownership interest. But, when it comes to an LLC, the members have the freedom to decide how profits should be shared depending upon the terms and conditions of LLC’s operating agreement. LLC members don’t necessarily accept profits based on the proportion of their ownership; rather they can distribute profits in an unconventional manner. Like say, one member can consent to take less than the percentage of his/her ownership interest if another member comes forward to devote extra time and efforts towards the LLCs everyday operations.
Given the above discussed benefits of structuring a start-up business as an LLC, the owners/members can save themselves from many complications of other business forms. It is a convenient, cost-effective and less stressful way of starting and growing your business!
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