What are the LLC (Limited Liability Company) benefits for my small business is a key question you may be asking yourself when starting a small business or as your business grows. It is no secret that most small business owners choose an LLC as the business entity for their business. This article will look at the major benefits this entity offers to those small business owners.
The LLC Benefit Of Asset Protection
Most small businesses start out either as a sole proprietorship or as a general partnership. Either classification leaves the owner (s) open to a lawsuit not only against their business but also against also against them personally, which puts their personal wealth and assets at risk. In the eyes of the law you and your business are seen as one.
An LLC solves that problem by making the business a separate entity from the owner. Your business is thus separated from you personally, meaning you have personal finances and business finances. Your personal assets are not at risk if a business liability arises. If someone sues your business they are not suing you personally and they are not able to touch your personal assets. The reverse of this is also true. If someone is suing you personally your business will not be affected.
Since an LLC is seen as a separate entity it can establish a new and separate credit profile that is distinct from your personal profile. This means that although your personal credit may be questionable you are able through the entity to build a spotless credit profile that allows you to receive loans, credit cards, lines of credit that would not be available to you as an individual.
If you are a landlord and have your property (s) in an LLC that same LLC serves as a protection for your personal assets from being attached to your rental business. With the LLC covering your rental property (s) you can earn as a sole proprietor since all the profits are yours alone and your protection is like a corporation since your personal properties are immune to attachment for payment claims.
A word of caution is offered here. If you are sued the courts will look at whether you are maintaining separate business accounts and running your business on its own accord. If you meet those guidelines you will have no trouble protecting yourself against any liability. If the guidelines are not met your entity may be compromised, meaning unlimited liability could apply. Be sure you have taken the time to see and understand your state’s perspective on this matter as well. The primary benefit of an LLC is to use the entity to help shield the owners (members) from business debt and lawsuits.
The LLC Benefit of Flexible Taxation
In its normal sole proprietor or partnership state the LLC provides for “pass through” taxation and typically does not pay taxes at the business level, thereby avoiding the double taxation that is found with corporations. The business is responsible for self- employment taxes. Any business income, deductions, losses, gains and tax credits are passed through to the owner (s) and reported on their personal tax returns and any tax due is paid at the individual level.
If you, as an owner, are actively participating in the running of the LLC you are allowed to deduct operating losses against your regular income. Your LLC is required to file an informational return showing all the members and their taxable income on form 1065 but the LLC is not required to file a tax return.
Once your LLC has been established you have the added benefit of selecting how you wish to be taxed and you do so by way of an “election” which allows you to be taxed as corporation, either a C Corp or an S Corp. Taxed as a C Corp (using IRS 8832 form) the LLC will be taxed separately from the owners. The profits that remain in the LLC after the end of the tax year will be taxed at the corporate tax rate (15% for the first $50,000) which is often less than the personal tax rate. Additionally electing the C Corp status allows you to choose when the fiscal year ends, thus allowing you to move money from one tax year to another and thereby controlling in many cases the tax bracket you will fall into.
The C Corp election is a god send for individuals that suffer from chronic and significant medical problems. All medical expenses for all family members are deductible, starting with the first dollar. This is a far cry from the normal IRS rule that allows you to deduct medical costs if they are more than 7.5% of your adjusted gross income.
An LLC can also elect to be treated as an S Corp, using the 8832 form, followed by the IRS 2553 form which is the “Election by a Small Business Corporation” but your membership is restricted to US citizens or resident aliens using that election. Check here http://homebusiness.verticalrising.com/tax-savings-with-a-corporation-or-llc/ to learn more about the restrictions attached to an S Corp.
The S Corp is considered by many to be very favorable for active businesses where the owner wants to spend all or most of the profit generated by the business. This is because in addition to a “reasonable” salary that is paid to the owner of the company, the owners and shareholders can receive income in the form of distributions. These distributions are free from Social Security (12.4%) and Medicare (2.9%) taxation. Offsetting your salary with distributions will equate to a sizable income tax reduction.
As has been demonstrated there are a number of tax scenarios available to the LLC and different tax benefits are available depending on what election is made. Another cautionary note is worth mentioning. Not all of these elections are interpreted in the same manner by the various states, the requirements of the entities can and do change, as do the maintenance requirements. From my perspective anytime you are making an “election” you should confer with your attorney, your CPA and your state agency to make sure the your election is best for you and your business.
This article has focused on the major benefits an LLC offers to your small business. Liability protection and flexible taxation are the main reasons this entity is chosen by small businesses.
In Part 2 Of “What Are The LCC Benefits For My Small Business” I will examine the benefits of more credibility, the enhancement of your professional image and brand and the freedom to operationalize and run your business in the least restrictive manner. Click here for immediate access.