Forming an LLC is a popular structure for businesses due to a long list of benefits. The specific advantages of an LLC will vary from state to state. That being said, there are some commonalities across all states that make limited liability companies an attractive option for businesses. This site is inactive, but you can learn more about the benefits of Florida Limited Liability Companies here.
The most common alternative to forming an LLC for a small business would be sole-proprietorship. Sole-proprietorships essentially make the person and the business the same. There are not any legal requirements for a sole-proprietorship to start and only a single person owns them. This is a common choice for new businesses since there is not any additional paperwork. Unfortunately, sole-proprietorships do not have the asset protection LLCs do and pay additional taxes. Viewing the disadvantages of a sole-prop can provide insight into some of the major benefits of LLCs.
The most serious disadvantage of a sole-proprietorship compared to an LLC is the unlimited liability. The owner of a sole-proprietorship has full responsibility for the debt, including business debts and lawsuits. In fact, the owner of a sole-proprietorship may have to sell their personal belongings in order to pay those debts. By contrast, this is never a concern with an LLC since the business is fully separate from the owner’s personal assets.
Additionally, sole-proprietorships pay higher taxes. Specifically, they will pay identical taxes to any wage owner. In other words, sole-props cannot benefit from the latest tax code and its benefits for smaller businesses. They pay extra in their taxes on earned income. By contrast, LLCs can take advantage of the tax code to pay lower taxes.
Sole-proprietorships also have a lack of privacy. Since sole-props keep the business and owner as the same person, the owner’s name appears on everything, including public documents. Even the owner’s address appears. By contrast, LLCs allow for anonymity and many Secretaries of State will not list managers or owners. In cases where a State’s Secretary does publicly list that information, there are ways of getting around it to protect privacy, which you cannot do with sole-props.
There is also the fact that a sole-proprietorship simply does not have the same professional reputation as an LLC. Forming an LLC shows your commitment to the future and desire to grow the company.
To glean further benefits of LLCs, compare them to corporations. Both entities legally separate the businesses and owners for asset protection. Both types of companies can also last forever since they are not connected to a specific person.
Moving onto advantages of LLCs over corporations, corps have double taxation. This means that the corporation pays taxes on its income and then the income that the owner receives via dividends gets taxed on personal income taxes. There is one exception: S-Corporation, but that is not a good structure for every business. By contrast, LLCs use pass-through taxation so double taxation will not be a concern.
Additionally, corporations tend to have titles and operating structures that are more rigid. They require a President as well as a Board. The requirements for LLCs are not as rigid, allowing for more flexibility.
Thanks to the range of benefits, limited liability companies will continue to be a popular option for businesses.