There is an assumed measurement of power and prestige to a business when it adds an LLC or Limited Liability Company suffix to its business structure. But that perception actually is just a part of what incorporating a business can actually do.
Anyone can get an LLC; the paperwork is fairly simple and straightforward. Each state has an annual filing fee around $200, and Legal Zoom, for example, will do all the LLC paperwork for your small business.
But it’s a good idea to know how you can use it to your advantage, and when it actually does you and your business good.
In nutshell, here are some points to understand in regard to incorporating or filing for an LLC for your small business.
1. Yes, an LLC brings you credibility with customers. That “LLC” or “Inc.” can make your company appear larger and more established.
2. But more importantly, an LLC protects your personal assets. Having a corporate entity helps safeguard your personal assets. Sole proprietors and partners are liable for business debt and lawsuits filed against their business. With an LCC, your personal identity is separate from your business one, and creditors can’t get their hands on your homes, cars, and savings.
“In an LLC, the owner has liability protection against the acts of his employees,” says Morris Armstrong, a financial planner who owns his own business — Armstrong Financial Strategies — but does not have an LLC. “You cannot shield liability for your own actions, however they may be covered under an insurance policy.” Those who are members of the LLC have their personal assets shielded against many actions.
3. An LLC can be more attractive to investors. When personal and business assets aren’t separate, liability investors are less inclined to hand over capital and purchase shares in a corporation.
4. Of course, an LLC has its tax benefits. Sole owners and partners can have the company profits and losses pass directly through to their personal tax returns. With corporations, profits are double taxed — distributed to shareholders as dividends and then taxed again personally. An LLC or S corporation can be taxed like a partnership. While an LLC permits an unlimited number of members to enjoy the benefit surplus of their individual ownership percentage, if there is just one owner, the company will be taxed as a sole proprietorship.
5. An LLC offers uninterrupted business. When your business is an LLC or S corporation, there is no legal entanglement when the owner retires or dies. The LLC and S corporation is a legally binding business structure that endures retirement and death.
6. You should file in the state you plan to conduct business. Filing in your home state can be the least challenging and cheaper because you don’t have to pay franchise taxes and you can avoid filing annual reports in several states.
7. No employees, no LLC. If you’re a small business of one, your personal assets could still be at risk under an LLC. You also can’t pay yourself wages.
“A person [with a small business but] without employees does not receive the full benefit of the LLC and often does an LLC simply to appear larger,” says Armstrong. Until recently, many states did not allow one person LLCs to be formed.
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