Opening up a small business may come to mind if you wish to have your own income source.
Although small, establishing this type of enterprise isn’t that easy. There are many things to consider, including the legalities that come with it.
In 2021, there were 332.99 million small and medium-sized enterprises (SMEs) globally, a significant leap from 2019’s 328.5 million.
This data suggests that more and more people are starting their own small business ventures, making the market hyper-competitive, with many entrepreneurs and companies vying for clients and customers.
Standing out among these competitors can be challenging in the United States, which is why a Limited Liability Company (LLC) is essential.
An LLC is a legal entity that can protect you, and if you’re unfamiliar with this business structure, read on to learn what it means and why you should form one for your venture.
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Defining A Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a structure that can shield American small business owners from bankruptcy, debts and other accountabilities.
State statutes permit this structure, so you should check for your state’s requirements since they can differ from others.
Depending on your venture type, the LLCs you can apply for are the following: single-member, multi-member, low-profit (L3C), series LLC, professional (PLLC), and restricted.
Some states may not have restrictive LLC requirements, allowing anyone to form one.
Nonetheless, some entities, like banks and insurance companies, aren’t allowed to create their own.
Why Small Businesses Need An LLC
LLCs can provide an operating structure that serves as your business’s regulations for decision-making, profit and loss division, and owner changes.
More than this, an LLC can also do the following for your small business:
1. Tax Benefits
Pass-through taxation is the most prominent tax benefit you can get from forming an LLC.
In pass-through taxation, the company’s income is passed on to your personal income taxes, which can lower the taxes you pay.
It applies to sole proprietorships, partnerships, and S-corporations, as long as there are no exceptions.
This benefit can also help you avoid double taxation by not choosing to be taxed as a corporation.
LLCs can also allow you to write some business deductions to lower your income taxes if the business is a pass-through entity.
You can have deductions for travel expenses, marketing, and advertising. Remember that not everything is deductible, so consult an accountant or a tax professional to know your business’s eligibility.
2. Protection Of Assets And Liabilities
From the name itself, an LLC focuses on protecting your assets and liabilities because it separates your properties from your business.
When your company faces liabilities and lawsuits, you and your assets have a safety net to prevent losing them.
However, you could be personally accountable if there is evidence of negligence and fraud.
3. Credibility
Turning your business into an LLC provides credibility because it establishes a separate legal identity for your business.
You have exclusive rights to your business name and other obligations when you have a legal identity.
These responsibilities are aligned with the written agreements established, which is how an LLC provides limited liabilities to safeguard your assets from debts and lawsuits.
4. Ease Of Formation And Management
Forming an LLC appeals to small business owners like you because creating and managing it is usually easy and cost-efficient.
The process will be based on your state’s requirements, which will likely have minimal paperwork.
A registered agent can help you apply for an LLC in your state. They will help you create a name and prepare and file your articles of organization.
Upon application, you will also write an operating agreement. This agreement determines how your business will operate and how profits are shared.
Additionally, unlike corporations, an LLC doesn’t require governing bodies like a board of directors.
5. Ideal For Solopreneurs
Solopreneurs operate some small businesses, and you may be the same.
As a solopreneur, you’re the only one organizing and managing the business’ daily operations because you don’t have a business partner to work with. In general, solopreneurs are typically self-employed.
LLCs are ideal for solopreneurs because they are usually cost-efficient. If you’re a solopreneur who wants to turn your business into one, you can plan a budget for application without losing significant capital.
Managing a small business alone may seem easy, but it can get daunting once you hit rock bottom. Being a solopreneur doesn’t guarantee a smooth business flow.
Suppose you’ve taken out loans to start your business but could not repay them within the agreed-upon timeframe.
Without an LLC, you could risk losing your personal assets, which can be especially difficult as a solopreneur.
Grow Your Small Business With An LLC
Your small business is essential to the economy’s growth since it can provide jobs to people who need them.
Growing it is challenging, but making it an LLC can provide opportunities to upscale your recognition, sales, and revenue. It may also be less likely to be sued, given that you operate responsibly.
LLCs can help grow your small business, but most of the hard work will always come from you.
