Operating your new business as a sole proprietorship is certainly the easiest route to go, but it lacks certain advantages – like personal asset protection and a formality that can make it easier to obtain financing. Just the same, incorporation – with all its initial expenses and legal formalities – seems like a bridge too far.
Is forming a limited liability company (LLC) the perfect solution? LLCs are a very popular business model for a number of reasons. These include:
It can serve as a shield against personal financial losses
A lot of businesses struggle to stay afloat during their early years, and not all of them make it. As a member of an LLC, your personal assets are generally shielded from the company’s debts and other liabilities – which is not true when you are a sole proprietor.
You can enjoy flexibility in management and taxation
Unlike corporations, which generally have a rigid management structure, LLCs allow you to choose between member-managed and manager-managed structures when you create your operating agreement, depending on the level of direct control you and the other members want to exert.
Most LLCs also feature a “pass-through” taxation system, which can be easier to manage. Profits and losses are counted on the members’ personal tax returns. This can make for significant tax benefits, particularly in a company’s lean years, since the losses can offset other income you may have and reduce your overall tax liability.
There are minimal administrative requirements
New businesses require a lot of direction and energy, so the administrative burden of a regular corporation can be a lot. LLCs have relatively few ongoing administrative requirements, including less record-keeping and meeting requirements, in comparison. That can allow you to focus your time and resources on growing your business instead of worrying about compliance issues.
LLCs offer a certain amount of credibility
Finally, if you are seeking financing or expect to do so in the future, an LLC is formal enough to make it easier for potential investors or lenders to assess the company’s health without getting tangled up in your personal financial matters. That can inspire more confidence and make others more willing to extend credit.
Does this automatically mean that an LLC is the right business structure for your needs? Not necessarily – but it is a compelling option that you probably should explore before committing to an alternative.
