If you’re looking at this article, you’re likely a freelancer or side hustler who wants to take things to the next level. You can do this by forming an LLC.
Limited liability companies (LLCs) help you to limit your liability. The LLC allows you to maximize your tax write-offs, and profit sharing is flexible.
This is only the beginning of what an LLC can do for you. We will then walk you through all the reasons you might want to create an LLC.
What does an LLC mean?
Limited Liability Company is the short form of Limited Liability Company. It is a US business structure that protects owners from personal liability for financial or legal issues.
If you own an LLC, you will have protection for your assets in case of business disputes.
Your LLC can be owned by other members or by yourself. This makes sense.
An LLC is not new. LLCs have been in use since 1977. And for good reason. You can protect your assets easily without the hassle of forming a company.
If you’re interested in transforming your company into a corporate entity, it may be worth considering. However, it doesn’t mean that you must convert immediately. Instead, it might make sense to work towards corporation status over time. For now, enjoy the flexibility of an LLC. Then, if circumstances require it, it can become corporatized.
Benefits of an LLC
It didn’t take us long to realize the advantages of an LLC. The benefits of an LLC are numerous.
1. In No Time, Form an LLC
Forming an LLC is easy. You can complete and submit all the paperwork in just a couple of hours.
You don’t need an operating agreement or shareholder meetings. There are no records of shareholders, business resolutions, minute books, or minutes from the shareholder’s meeting.
An LLC can be formed by one person. It does not require multiple members as a corporation.
You don’t need to worry about corporate regulations if you have an LLC. Your business is enough of a concern.
Even though the fees and paperwork may seem minimal, it is important to plan for these costs.
The amount of the formation fee depends on where you reside. In Colorado, you will pay $50, but in Massachusetts, you will be charged $520. You will be required to pay a fee each year for your LLC’s annual report. This fee can range anywhere from $0 up to $520.
Although this fine might seem high, you can almost always recoup the amount (and more) by reducing your LLC taxes.
2. Limit Your Liability
An LLC will allow you to separate the business from your identity. You can protect your possessions and keep them safe. The bank or plaintiff will not be able to reach your house, your car, and your savings.
Comparing this to a sole proprietorship or partnership, the government views them as the same. When someone goes after your company, they will likely go after you as well.
The limited liability company exists to protect you, but it is not the only way. Liability is present but reduced.
You may be held responsible if your negligence causes harm to another person.
3. Select Your Tax Status
You have many options with an LLC. Single-member LLCs are taxed as sole proprietors and multi-member LLCs are taxed as partnerships–meaning the IRS subjects both to pass-through taxation. You won’t need to report business taxes separately if you use pass-through taxation. Report your business income when you file your tax return.
If you want to avoid the double taxation corporations face, tax your LLC as a C-corp. This will reduce your taxes, increase your deductions, and avoid double taxation.
4. Manage Your Way
Members of an LLC have the option to either hire a manager or manage the business themselves. You can run your company on a day-to-day basis as well as over the year.
Corporate entities are not allowed the same level of flexibility. They must adhere to stricter rules. Shareholders elect a board of directors annually, who hires a CEO or general manager to manage the company.
Your LLC will allow you to manage your business with no bureaucracy. There is no need to seek permission from the board to do so. It’s possible to choose someone else who can handle your business better.
If you want to leave your company or change it in the future, an LLC allows you to do so without any red tape. “
5. Enhance Your Credibility
Trust is the key to doing business. Before you find new clients, business partners, or loans, you have to earn trust.
While sole proprietorships aren’t necessarily bad, many people view them as less legitimate. To a certain degree, it makes sense–you don’t need much money to start these businesses.
Shows a bit more dedication. You are serious and you will invest the money and time to get your LLC up and running. People take notice and show interest, even though they may not know what an L.L.C. is or why it is important.
When you form an LLC, it is mandatory to add the word “LLC”. This makes your company’s name appear more official without being pretentious. It was required that you add the “LLC”.
6. How To Qualify For A Business Loan
Your business will require funding at some stage. It is difficult to find capital since it costs money to make money. Small business loans are almost always more affordable even if equity will be part of the loan.
Your business will always be paying for equity. You will pay a percentage of the loan amount.
Banks, alternative lenders, and other financial institutions are reluctant to give loans to sole proprietorships or partnerships. They want to know that the borrowers can pay and will not default on their debts. This extra level of confidence is provided by forming an LLC.
Personal guaranteeing puts your assets on the line but is often required for larger financing.
7. Protect Your Brand
You get the exclusive right to use your company name when you create an LLC. Other businesses within your state can no longer use that name. They cannot.
If you’re serious about protecting your brand and do not want someone else to steal it, an LLC will be the most effective way. However, that isn’t the end.
You can stop another business from using the name of your company by forming an L.L.C. Other states can form similar businesses. For example, you could open Sara’s Sweet Shops (whose name might not be Sara), but another person in West Virginia or North Carolina might do so.
Even if you don’t want to, trademarks are still a good idea. They give exclusive rights to the company’s name, logos, and taglines. It’s not just your state that can use them.
8. Start a Solo 401(k)
If you don’t have any employees, then a Solo or self-employed 401k is the best option. Contributions can be made pre-tax and the savings invested in different vehicles up until retirement.
Contribute as much money as you like.
Why should you change to an LLC?
Many professionals advise you to wait until you have a substantial amount of income before creating an Inc. However, this ignores all the other benefits of starting an INC.
Limiting your liability with a limited-liability company can be a smart idea. An LLC will also boost your creditworthiness and help you qualify for loans. Although it might not seem “worth it” in terms of taxes, its benefits are just too good to overlook.
You can also create your LLC by yourself if you wish. It is better to use a professional for the process.
We would answer “yes” if asked if we think you should create an LLC. You can protect your assets and enjoy tax advantages, as well as legitimize your company.
As we are not tax or legal professionals, it is recommended that you seek the advice of a professional who has experience in finance. They can help you navigate regulations.
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Now that you know what an LLC is, it’s time to focus on the other aspects of your business. Now it’s time for you to concentrate on other areas of your business.
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