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The Pros of Forming an LLC

There are many benefits of forming an LLC, including personal asset protection, flexibility in management, and pass-through taxation. Read on to learn more about the pros of forming an LLC.

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Overview

Limited liability

When you form an LLC, your personal assets are protected in the event that your business is sued. This means that if your LLC is sued, the court can only go after the assets of the LLC, not your personal assets. This is one of the biggest advantages of an LLC.

Personal asset protection

If you form an LLC, your personal assets are generally protected from creditors and from lawsuits arising out of your business dealings. This is not the case with sole proprietorships and partnerships, where your business and personal assets are considered one and the same by creditors. Limited liability protection is one of the main reasons that people choose to form LLCs.

Limited financial liability

One of the biggest advantages of forming an LLC is that it limits the financial liability of its owners. This is because LLCs are treated as “pass-through” entities for tax purposes. This means that the income and losses of an LLC are “passed through” to its owners, and are only taxed once at the owner level. In contrast, corporations are “double taxed.” This means that the corporation itself is taxed on its income, and then its shareholders are also taxed on any dividends they receive from the corporation.

Another way that LLCs can limit their owners’ financial liability is by using different classes of membership interests. For example, a membership interest in an LLC can be classified as a Class A interest, which gives the holder a right to vote on LLC matters, or as a Class B interest, which does not. This can be helpful if there are different levels of ownership involvement in the LLC. By having different classes of membership interests, it’s possible to limit an owner’s financial liability to only those assets that have been allocated to his or her class of membership interest.

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Tax benefits

Unlike sole proprietorships and general partnerships, an LLC has the advantage of pass-through taxation. This means that the LLC itself is not taxed on its income; instead, the taxes are “passed through” to the LLC’s owners, who report the LLC’s income on their personal tax returns. This can save you a significant amount of money on your taxes.

Pass-through taxation

An LLC offers what is called pass-through taxation. This means that the business itself is not taxed on its profits. Instead, the IRS “passes through” the profits to the individual LLC members, who are then responsible for paying taxes on their share of the profits. This can be a significant advantage over other business entities, such as C corporations, which are taxed both at the corporate level and at the individual level.

Self-employment tax savings

As a sole proprietor, you must pay the entire amount of Social Security and Medicare taxes on your net earnings (revenue minus expenses). According to the most recent data from the IRS, this totaled 15.3% of net earnings in 2012.

LLC owners are not subject to self-employment taxes. Instead, each LLC owner pays taxes on his or her “distributed share” of profits. For example, let’s say you are the sole owner of an LLC with annual profits of $50,000. You would pay self-employment taxes on $50,000. But if there are five LLC owners, each with a 20% stake in the business, you would only pay taxes on $10,000 (your distributed share of the profits).

Increased credibility

When you form an LLC, you create a separate legal entity for your business. This can increase credibility with customers, suppliers and business partners. They will see your LLC as a professional and serious business. An LLC can also help you get funding from investors.

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Professionalism

When you form an LLC, it can show potential clients and contractors that you are serious about your business. This type of professionalism can help you to get more clients and contracts because they will see that you are not just some fly-by-the-night expecting to disappear in a few weeks or months.

An LLC can also give your business an air of stability. This is important for businesses that may be perceived as high-risk, such as start-ups. By having an LLC, you are telling potential customers and clients that your business is here to stay and that you have taken the necessary steps to protect it.

Increased business opportunities

When you form an LLC, other businesses take you more seriously. They see that you’ve gone through the formalities of becoming a legal business entity, and they’re more likely to want to do business with you as a result. This can lead to more opportunities for your LLC, such as partnerships with other businesses, investment offers, and improved access to business loans.

Flexible management structure

LLCs have the ability to elect how they want to be taxed, which gives the owners the ability to choose how they want to be taxed. LLCs are also not required to have a board of directors, which means that the management structure is more flexible.

Member-managed

An LLC can be managed by its members or by a designated manager. If it’s member-managed, each member has equal say in the management and operation of the LLC, and each member can bind the LLC in contracts and agreements. This is the most common structure for smaller LLCs.

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Manager-managed

An LLC can be manager-managed or member-managed. Most LLCs are member-managed, meaning that each member has equal say in how the company is run. In contrast, a manager-managed LLC gives a designated manager(s) the authority to make decisions on behalf of the company, without input from the members.

There are several advantages to having a manager-managed LLC, including:

1. More flexibility in terms of management. Members can choose to be as involved or uninvolved in the day-to-day management of the company as they want, and can delegate those duties to one or more managers.
2. clearer lines of responsibility. With a manager- managed LLC, it is clear who is responsible for making decisions and carrying out the company’s business affairs. This can help to avoid conflict among members about who is responsible for what.
3. Potential tax benefits. In some cases, having a manager- managed LLC may provide certain tax benefits, such as pass-through taxation (meaning that the LLC’s income is taxed at the individual level rather than at the corporate level).

There are also some disadvantages to having a manager- managed LLC, including:

1. Less democracy in terms of decision-making. Since members do not have a say in how the company is run on a day-to-day basis, they may feel like they have less control over the direction of the company.
2. Potentially more expensive to set up and maintain. Manager-managed LLCs may require more paperwork and may be subject to additional filing requirements with state governments

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*This applies to Virginia residents too!

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