Benefits of Forming an LLC in the USA

The dream of becoming your own boss is fulfilling and exciting, especially if you're prepared to set up your own company. However, you should start by deciding on the business structure on which to build your company.

Your choice has profound implications for your business, so you must make a proper decision. Factors like legal responsibility, legal guidelines, taxation, and others depend on your business form, which can be a Limited Liability Company (LLC), Sole Trader, Corporation, or Partnerships.

The easiest and most efficient way to start a company in the US is to incorporate a Limited Liability Company (LLC). This blog will explore what an LLC is and the benefits and drawbacks of setting one up in any state in the US.

What is LCC?

An LLC is a business structure in the United States that protects the owners from legal action taken against the business. It shields owners' personal property, such as their home or savings, if they fail to repay their debts. This is the opposite of a sole trader, where your personal property is at risk if the business property is distributed.

The owners of the LLC are referred to as the 'members. You can create a single-member LLC that can be single –a member (owned by one individual) or a multi-member (owned by many people).

An LLC is a legal structure that takes the essential features of corporations and partnerships. It combines a corporation's legal entitlement and responsibility, the pass-through taxation of a partnership, and the flexibility of operation and management.

LLC laws are state-based in the U. S but recognized throughout the country and with legal variation in different countries.

This structure has existed since 1977 and is becoming popular because of its operating ease and protection. Even though it might be necessary to convert the business into a corporation in the future, incorporating it under an LLC is a better option because of flexibility and legal shelter compared to a corporation's complexities.

Benefits of an LLC

Forming an LLC in the US has plenty of benefits. You should consider setting up an LLC for each of these reasons.

1. Easy to set up

Registering for an LLC is relatively easy, and you can complete it in a few hours at a reasonable charge through the Foundeck Formation Agency. With an LLC, you don't need an operating agreement, shareholders' meetings, or extensive documentation like in corporations. Starting an LLC doesn't need to involve multiple members; you can form it alone.

LLCs are straightforward to manage and do not contradict many corporation rules. However, they have ongoing obligations, such as filing papers yearly and charges that differ from one state to another. For instance, filing fees may cost as low as $50 in Colorado and as high as $520 in Massachusetts, and annual reporting fees also vary across the states.

Although the costs may seem rather steep, many tax advantages come with forming an LLC.

2. Limited liability

Like a corporation, another advantage of an LLC is that its owners have limited liability for business debts and obligations. For instance, John operates an auto spare store called Solution Auto Spares, which is experiencing poor financial performance and has accumulated unpaid rent and supplier debt of $75,000.

Nevertheless, they cannot seize John's personal assets, including his bank accounts and properties, to recover the debt. They can only use business assets to clear their debts. This protection is a significant plus, especially compared to sole trader and partnership businesses where the owners risk their personal property.

3. Flexible taxation

When you incorporate an LLC, you have different ways to pay your taxes. An LLC does not pay corporate taxes unless it chooses to be taxed as a C corporation.

Instead, the IRS allows the profits of an LLC to be passed directly to the owners and then taxed as personal income, known as pass-through taxation. This method assists in avoiding double taxation, which is a challenge to corporations. However, based on your selected tax classification, you will still be liable to pay self-employment taxes.

Here are four taxation ways you can choose for your LLC:

1. Sole proprietorship for single-member LLC only: a single-member LLC is taxed as a sole trader. The business income is distributed to the owner, who pays tax. Owners fall under the employed class, meaning they must pay self-employment taxes such as the Medicare and Social Security taxes.
2. General partner for multi-member LLC: a multi-member LLC pays tax as a partnership. Members receive their profit share, for which they pay income tax. These members also pay self-employment taxes from their profits.
3. C corporation for single or multi-member LLC: you can also decide to pay taxes as a C corporation, where your profits are taxed at the corporate rate. As a C corp taxpayer, you don't pay for self-employment taxes, but if you receive a salary from the LLC, you must pay payroll taxes.
4. S corp for single or a multi-member LLC: you can also pay your taxes as an S corp. In an S corporation, the owners can receive a salary subject to payroll taxes. The remaining business profits flow through as income to the owners. However, these profits are not taxed like self-employment income. S corps are flow-through entities, meaning they do not pay corporate income taxes.

4. Perpetual existence

LLC has perpetual existence unless stated otherwise in the articles of organization. This means that the company does not have to dissolve in case of changes in ownership. Hence, the death, prison, or disappearance of a member does not have to be the end of the business.

In most states, LLC dissolution occurs only if:

1. An occasion outlined in the operating agreement, takes place.
2. All the members agree to dissolve the company.
3. If an administrative order requires dissolution.

In some states, it is legal for the LLC to dissolve when the last member passes on or opts for withdrawal. Nevertheless, the LLC has the power to negotiate another member's appointment into the business, which will help it carry out its functions.

5. Allocation flexibility

LLCs offer significant flexibility in investment and profit distribution. Shareholders aren't supposed to subscribe equivalent to the percentage of the shares they own. For instance, the shareholder with a 25% stake share does not need to invest a similar proportion of the initial capital. In an operating agreement, the members can specify how the profits and losses will be split regardless of their contribution.

This makes it possible for outsiders to invest without owning a chunk of the company or organization in question. In the same way, profits can be split separately from shares, thus allowing some members to earn more even though they own a small interest in the company based on extra exertion or the time spent within the business.

6. Flexible management

Under LLCs, the option of operating the business through the owners or engaging a professional manager is available. This lets you make strategic alterations to your business management, if necessary, at some point in life.

On the other hand, corporations have more rigid guidelines regarding their operations. The shareholders must appoint their own board of directors every year, and the board of directors is entitled to appoint a chief executive officer or general manager of a business.

However, with an LLC, you do not have this formal arrangement. You can run the business as is and not worry about the employer replacing you. Later, if you want a more experienced person or someone with more time on their hands, you can appoint a manager without going to the board.

This management flexibility may not be significant now but may become necessary as your business grows. That means that if you ever wish to expand your ventures or step away from managing the company, you can do so without having to face unwanted obstruction.

7. Transfer in financial interests

A membership interest of an LLC member is a share in the LLC's monetary capital and operating authority. It allows members to share profits, losses, and distribution; these financial rights are alienable by operation of law but as provided by the operating agreement.

However, as a general rule, management rights, such as the right to participate in decision-making by LLC members, may not be conveyed without the consent of all the other members unless provided for in the operating agreement.

Another legal advantage of LLCs is protection from a 'charging order,' where a member's creditors try to collect the member's LLC interest. They are allowed access only to the LLC's financial rights but not its control.

8. Enhance credibility

Trust is vital to any business, whether you are looking for partners, loans, or customers. While sole proprietorships and partnerships are equally legal and recognized business forms, they are sometimes considered less formal. That is so because they do not demand much work to establish.

Setting up an LLC portrays you as more serious about your business through the charges, legal formalities, and time it takes to form. Even if people do not comprehend an LLC, it enhances credibility.  

Additionally, an LLC is not so restrictive; one of the few rules is to include the word "LLC" after your business name; this makes it more professional without overdoing it.

9. Easy to get loans

At some point, your business will need funds for financing, which can be obtained through equity; however, a small business loan is cheaper. Loans are paid back, while equity involves relinquishing part of your business.

However, due to a lack of trust, most banks and other lenders are unwilling to extend credit to sole traders or partnership businesses. Forming an LLC can increase their confidence, thus giving them a better chance of getting the finances.

While your personal assets are safe in case of an LLC default, lenders ask for a personal guarantee, which indeed involves personal assets but is standard in getting bigger loans.

10. Protect your brand

Business formation gives you legal protection of the company name within your incorporation state, thus making it unlawful for anyone to operate another business under a similar name. However, such protection only applies within your state of residence. Others with companies in other states could still be using the same name.

To protect your brand across the country, you must apply for a trademark for your brand name, logos, or slogans. Trademarks have wider protection than the state boundaries, apart from those already enumerated.

Drawbacks of an LLC

However, as with any structure, an LLC also has some disadvantages to consider when forming this type of business.

1. Limited life

An LLC's lifecycle may depend on its members; in most legal systems, the business will close down if a member pulls out. The remaining members can then pay off any debts and can either create another LLC or dissolve the LLC. However, the above problem can only be prevented by entering specific clauses in the operating agreement.

2. Charges

LLC fees, such as the filing fee, other fees for formation and fees for subsequent years, and the annual report fees, are relatively higher than those of sole traders or partnership companies but slightly lower than C-corporations.

Form Your LLC with Foundeck Today

Foundeck offers a range of fast and efficient online company formation services, allowing you to register a business structure of your choice quickly from anywhere and keep it compliant. To get started, kindly contact us here.

Winding Up

merits like protection, flexibility, and tax attributes make LLCs a good option. US LLC offers various taxation options and also gives members personal protection against liability. This makes LLCs appropriate for small businesses because the formation of LLCs is straightforward and requires less effort to run. However, you need an attorney to give you an expert opinion. Do you have any question about how the benefits of opening an LLC in the USA? KIndly contact one of our experts here for help today.