If your company is not incorporated and your legal structure is as a DBA sole proprietorship, you should seriously consider forming an LLC right away.
It is a very good idea to form an LLC to aid your business and personal goals. Know the fact that LLC (Limited Liability Company) protect you the business owner, and your family, from the business debts and lawsuit judgments. Most small business experts recommend this legal structure as their preferred organization.
Not too long ago the only type of structure to protect owners assets from business lawsuits were corporations. Even the simplified version, type-S corporation, was difficult to establish and complex to maintain reporting compliance.
Now with the option of an LLC vs a corporation as business entity, business owners can get good protection from present and future business debts from collecting against their personal assets. As LLC are being more established and commonplace, invididual states are extending even better tax benefits than ever before.
If you are the single business owner, you can indeed form a one-person LLC and it will be taxed as a DBA sole propriertorship. You also get the important protection of limited personal liability and additionally get the positive tax benefits of sole propriertorship. These include owner salary as distributions of profits, taxed a the individual lower rates; business loss pass through which reduces the owner’s taxable income substantially.
In addition to these benefits of LLC formation, owners can also enjoy the ability to have:
- More than 75 business owners
- Nonresident alien as an owner
- More than 80% ownership in a different corporate entity
- Pass through business loss tax deductions greater than the owner’s investment in the business inititally
- Uneven ownership percentages that may be different than the owners investment in the business
- Members owners who are active in the business management still maintaining their personal liability exposure to be limited.
Less Paperwork – Less Labor
In addition to the tax advantages described above, LLC require less paperwork to set up. Plus they require less labor annually to fulfill the state requirements of corporations such as; shareholder meetings, annual reports and states fees.
LLC do not have to stage annual meetings and are also not mandated to keep detailed records, as corporations are required. Most states do not even have LLC annual report filings laws.
Flexibility of Ownership
The S-type corporation does enjoy pass-through taxation benefits, however, they are strict restrictions about ownership. S corporations cannot have more than 100 owners, nor foreign or corporate shareholders. Compare that to LLC which give you the same tax savings of pass-through with no restrictions on the number or type of owners/members allowed.
The fixed structure of management of corporations must include a board of directors. These directors regulate company rules and also are responsible for business operations. Most entrepreneurs want control and flexibility so they appreciate the lack of formal structure of an LLC. These business owners can make their own decisions about company policies and daily operational choices.
Types of Businesses that Should be LLC
Those companies that plan, in the present or future, to raise investment capital for their business should not be structured as an LLC. They should use the corporation business structure which allows for stocks issuance for equity financing, or to eventually go public.
If our firm was the maximum flexibility for ownership and managment decisions, with personal asset protection, then LLC is an excellent choice for your business structure. Also if you detest paperwork and complex filing restrictions, opt for an LLC as opposed to the more difficult to administer corporation structure.
Not all types of companies are allowed to be set up as LLC. Most financial companies including banks, trusts, and insurance agencies cannot become LLC. Some states also restrict certain industries. Check with your department of state for your requirements.
California will not allow these types of firms to be LLC; health care providers, accounts and architects.
When you are ready to form your LLC, read this comparision of incfile vs legalzoom for LLC to make your choice of online legal services provider.