Entrepreneurs often want to know what type of business entity they should set up for their companies. Limited liability companies (LLC) offer several surprising advantages, whether you’re expanding a brick and mortar retail operation or scaling an online business.
Traditional corporations, also called C corporations, pay taxes on profits, while shareholders pay taxes on dividends, thus establishing two levels of taxation. The company has numerous options for generating income, and it can eventually go public. On the plus side, corporations only have one level of taxation. Furthermore, the owner has the flexibility to distribute monies, thus reducing payroll taxes. On the downside, a C corporation must adhere to strict rules regarding organization and government, per state laws.
In that context, consider the following benefits of an LLC when deciding how to set up your company:
- LLCs and S corporations offer the same protection against litigation – protection that neither sole proprietorships nor general partnerships can provide.
- While corporations need to hold board and shareholder meetings, LLCs do not need to meet these requirements. In addition, running a corporation requires more paperwork, and owners must fill out a potentially complex annual report for the state each year. (That said, it is advisable to keep meticulous reports to appear as professional as possible and to limit possible exposure to lawsuits.)
- LLCs avoid the double taxation that S corporations might need to pay – depending on circumstances, this rate can be nearly 40 percent. Instead, LLCs pay taxes as individual income, usually at a reduced rate.
- LLCs minimize payroll taxes through the use of distribution to shareholders.
- The LLC owner has the flexibility to write up the business rules that govern voting, membership requirements and procedures to transfer or sell a member’s interest.
- Finally, the business owner who does not want to take a company public will appreciate the advantages of minimal demands regarding paperwork, reduced taxes and the protection of personal property from business-related lawsuits.
Do you need insight into what type of entity makes the most sense for you, given your entrepreneurial goals, your personal finances, your tax situation, and your risk profile? Call ILP at (800) 827-7784 for a consultation.
A graduate of Vanderbilt University Law School, Stan Miller is the managing partner for ILP+ Arkansas.