An LLC, in a nutshell, is a business structure that offers its owners legal protection by limiting their personal liability. Unlike with sole proprietorships, if your LLC faces bankruptcy or lawsuits, your personal assets (like your home or car) are protected. An LLC is also one of the more flexible types of business structures that can be owned by one or multiple people.
When you’re starting a business, one of the first decisions you’ll have to make is how to structure it. While you’ve got a variety of options to choose from, a limited liability company (LLC) is often a popular choice.
In this blog, we’ll explore the advantages of starting an LLC in greater detail and help you decide if it could be the right choice for you.
What are the main benefits of an LLC?
Whether you’re pursuing a single-member LLC or a multi-member LLC, this business type can offer several key advantages:
01. Personal liability coverage
One of the top advantages of forming an LLC is the level of personal liability protection it offers. An LLC creates a legal separation between you and your business. In other words, the law sees your LLC as an independent business entity.
This means that creditors can't target your personal assets to pay off business debts or claims. You can rest assured that everything from your personal savings to your home is safe while taking on the risk of starting a new business.
"One key benefit of an LLC is that it can protect a small business owner’s personal assets—like homes, cars, and personal bank accounts—from lawsuits against the business." - Shylene D’Addario, VP and associate general counsel at LegalZoom
02. Tax advantages
Unlike other business structures, LLCs can choose how they want to be taxed—which, in turn, can lead to significant tax savings.
As an LLC owner, you can elect to be taxed as a sole proprietor or corporation (C corp or S corp). Unless you choose to be taxed as a C corp, you do not have to pay corporate taxes and can avoid double taxation.
"LLCs offer the flexibility of filing taxes as a sole proprietorship, partnership, or corporation." - Shylene D’Addario, VP and associate general counsel at LegalZoom
An LLC can specifically choose from these tax classifications:
Sole proprietorship (a.k.a. “disregarded entity”): Single-member LLCs are automatically considered disregarded entities for tax purposes, meaning the LLC itself does not pay taxes. Instead, all profits and losses are reported on the personal income tax return (Form 1040) of the owner via Schedule C.
Partnership: Multi-member LLCs are automatically classified as partnerships for tax purposes. In a partnership, the LLC files an informational return (Form 1065), but the company itself does not pay income tax. Instead, profits and losses are passed through to the members, who report their share of the LLC's income or losses on their personal tax returns.
C corporation: An LLC can elect to be taxed as a C corporation by filing IRS Form 8832 (Entity Classification Election). As a C corp, the LLC files a corporate tax return (Form 1120) and pays taxes on its profits. This creates a scenario where profits can be taxed twice: once at the corporate level, and again at the individual level when dividends are distributed to the members. However, this option allows members to reinvest profits into the company at the corporate tax rate, which might be lower than the individual tax rate, and it offers benefits related to tax-deductible employee benefits.
S corporation: An LLC can elect to be taxed as an S Corporation to avoid the double taxation faced by C corporations while still enjoying pass-through taxation. This is done by first filing Form 8832 to be taxed as a corporation, and then Form 2553 to be treated as an S Corporation. S corp status allows profits (and some losses) to be passed through directly to owners' personal income without being subject to corporate tax rates, while still allowing owners to be paid as employees of the LLC. However, S corps have restrictions on the number and type of shareholders and shares.
Remember that tax laws are complex and can change frequently. It's always wise to consult with a tax professional to ensure you're taking full advantage of the tax benefits available to your LLC.
03. Flexible ownership and management
LLCs offer a flexible ownership and management structure, which may be particularly appealing if you prefer less formality and more freedom in how you run your business.
In terms of ownership, you can have as many owners as you’d like and divide up ownership as you wish. Not everyone has to put in the same amount of money to own a part of the company—people can also be rewarded for what they know or what they do. Neither ownership nor share of profit needs to be directly proportional to a person’s capital contribution.
It’s also fairly easy to change who owns parts of the business and/or to bring new people in. These changes can typically be facilitated through changes to the LLC's operating agreement and, depending on state laws, may just require filings with the state.
Unlike corporations, there's no need for a formal board of directors or annual meetings, either. You can choose to manage your LLC yourself (member-managed) or appoint managers (manager-managed). You can be as hands-on or hands-off as you please, with the latter option allowing owners to take on a more passive investment role.
That said, many states will assume that your LLC is run by its members unless otherwise noted in filings with the secretary of state (or the equivalent governing body).
04. Business credibility and trust
Forming an LLC not only provides legal benefits but also boosts the credibility of your business. Establishing yourself as an LLC can instill confidence in potential customers and partners by showing that you're a serious entity.
Plus, once you register your LLC, your name is typically protected within the state. You can additionally open up a business bank account for your LLC to keep funds separate from personal bank accounts, and stay on top of your finances.
Tip: You can build upon this credibility by using a .llc domain extension for your domain name when making a website.
Potential disadvantages of an LLC
While LLCs offer many advantages, they also come with certain drawbacks. These include:
Potential limitation on investment opportunities. Investors often prefer to put their money into corporations rather than LLCs due to the ease of transferring shares and the established hierarchy within corporate structures.
Self-employment taxes. Members of an LLC are considered self-employed and must pay Social Security and Medicare taxes, which can be higher than what corporate employees pay. Some stages may also require annual fees or franchise taxes that can add up over time.
Start-up costs and ongoing fees: Forming an LLC typically involves higher initial costs and ongoing fees than sole proprietorships or partnerships. These can include filing fees for the articles of organization, annual report fees and potentially higher state-specific taxes and fees. The costs vary by state.
Limited ability to raise capital: Unlike corporations, LLCs cannot issue stock to attract investors. This can limit an LLC's options for raising capital and might make it more challenging to grow the business or fund new initiatives.
Dissolution upon member departure: In some states and under certain conditions, an LLC might be required to dissolve if a member leaves, unless the operating agreement specifies otherwise.
Note: LLCs are subject to state regulations, which means the advantages and disadvantages can vary depending on where you form your LLC. Each state has its own rules regarding things like formation costs, statutory requirements and taxation.
Learn more:
Benefits of an LLC vs. sole proprietorship
When comparing an LLC to a sole proprietorship, there are some key differences to consider, especially regarding liability and formalities.
Formation: When starting a sole proprietorship, there's no need to file formal documents with the state. However, to start an LLC, you’ll need to file formation documents with the state, which comes with higher initial costs and potentially ongoing fees, but offers a formalized business structure.
Liability: Sole proprietors don’t offer any separation between personal and business assets, meaning personal assets are at risk if the business incurs debt or is sued. LLCs provide limited liability protection, shielding personal assets from business debts and legal actions.
Taxation: Both structures offer pass-through taxation, but sole proprietors don't have the option to choose corporate tax treatment.
Business perception: Sole proprietorships may be perceived as less formal or established, whereas LLC are often seen as more credible, which can enhance relationships with external parties and open up more opportunities for growth and financing.
Continuity and transferability: In a sole proprietorship, the business does not have a separate legal existence from the owner, so it ceases to exist upon the owner's death or departure. LLCs can have a perpetual existence, making it easier to transfer ownership and continue operations beyond the involvement of the original members.
Benefits of an LLC vs. corporation (S corp and C corp)
Corporations are more complex entities than LLCs and come in two main forms: S corporations (S corps) and C corporations (C corps). Each has distinct features in terms of taxation, ownership and governance.
Formation: Corporations require a board of directors, regular meetings and formal minutes. Incorporation also involves more paperwork and higher initial and ongoing costs. LLCs are easier to form and are not bound by these formalities.
Taxation: C corps face double taxation while S corps have pass-through taxation. However, S corps have strict eligibility requirements. LLCs, on the other hand, provide more flexibility with pass-through taxation by default—but can elect to be taxed as a C or S corp if that’s more beneficial.
Ownership: Corporations can issue stock, which can be an advantage for raising capital. LLCs do not issue stock but offer more flexibility in profit distribution.
Management: Corporations require a formal management structure with a board of directors that oversees corporate affairs, plus officers who manage daily operations. This structure is more rigid but clear-cut. LLCs offer flexibility in management; members can manage the LLC (member-managed) or appoint managers to do so (manager-managed), which can include members or outsiders.
Continuity and transferability: Corporations generally enjoy perpetual existence, meaning the corporation can continue to exist despite changes in ownership or management. The continuity of an LLC can be more dependent on the members' wishes. While many are set up for perpetual existence, some states have laws that require an LLC to dissolve upon certain events, such as the departure of a member, unless the operating agreement specifies otherwise.
Is an LLC worth starting?
An LLC could certainly be worth starting if you’re looking for liability protection and are seeking a relatively easy-to-start and easy-to-maintain business structure. However, you’ll want to weigh the pros and cons of starting an LLC.
An LLC, for example, offers lots of flexibility—but a corporate structure may offer more advantages if you plan on seeking external investment or eventually going public.
Ultimately, the decision should be based on a thorough assessment of your business plans, financial goals and legal factors. It’s always a good idea to consult a legal and/or tax expert for personalized advice tailored to your specific situation.
Need help setting up your LLC? Wix has partnered with LegalZoom, the No. 1 choice for online business formation to help you start, run and grow your business.
The basic steps of starting an LLC
Starting an LLC involves several important steps, from choosing a name to filing the necessary paperwork with your state. Here's a quick overview of the process.
Choose a name: Make sure your desired business name is available and complies with state rules. Use a business name generator for inspiration, and check your state business records as well as the United States Patent and Trademark Office's (USPTO) online database for any registered businesses or trademarks for that name.
Register your business: Check your local and state government for specific requirements for starting an LLC. You’ll typically have to register your business with your secretary of state (or an equivalent governing body). Sole proprietors and partnerships may need to file a "Doing Business As" (DBA) name.
Obtain an employer identification number (EIN): Most business types will need to obtain an EIN from the IRS for tax purposes, especially if you plan to hire employees. You can apply for an EIN online through the IRS website for free.
Apply for necessary licenses and permits: Depending on your business type and location, you may need specific licenses or permits to operate legally. Check with your state’s business agency, as well as local city or county offices, to determine what’s required.
Designate a registered agent: Select an individual or service authorized to receive legal documents on behalf of your LLC.
Create an operating agreement: Although not always legally required, it's highly recommended to have one in place. An operating agreement puts verbal agreements into writing, helping to avoid misunderstandings among members by clearly outlining the LLC's rules, financial arrangements and procedures.
Register for taxes: If your state has a sales tax or if you will have employees, you’ll likely need to register with your state’s department of revenue or taxation. This registration process varies by state.
Comply with ongoing requirements: Be aware of any ongoing reporting or renewal requirements, such as annual reports or franchise taxes, to keep your business in good standing.
The benefits of having an LLC operating agreement
As noted above, an operating agreement may not be legally required to start your LLC. But this document can be especially helpful if you have multiple members or plan to approach lenders or investors.
An operating agreement outlines the ownership and operating procedures of your LLC, helping to prevent misunderstandings among members. It typically describes things like:
Ownership percentages: Details each member's share of the LLC.
Voting rights: Establishes how decisions are made and who gets a say.
Membership changes: Defines the process for adding new members, transferring membership interests, what happens if a member wants to leave or if a member passes away—and any restrictions on these actions.
Profit distribution: Clarifies how profits and losses are shared among members
Management: Specifies whether the LLC will be member-managed or manager-managed.
Rules for record-keeping: Details the requirements for record-keeping, including what records must be kept, where they are stored and how they can be accessed by members.
Dissolution: Specifies the conditions under which the LLC may be dissolved and outlines the process for winding up the business, including distributing assets.