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How to Start an LLC: What Are the Benefits of an LLC?

7-minute read

A woman reviews papers at her desk.
Ed Grasso

Ed Grasso

7 May 2021

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Maximizing profits. Minimizing risk. Four words that often sum up the most important concerns for anyone who owns a business.

Starting your business as an LLC (limited liability company) offers advantages in terms of profits and risk protection — but wait, there’s more! We have a list of LLC benefits neatly wrapped and arranged for you below.

Six Benefits of Starting an LLC

1. Limited personal liability.

Much like an incorporated business, an LLC can protect your personal assets, such as your house, car, cash, and investments. In general, only your business assets can be touched in debt collection or legal claims against your business. In most states, and under most circumstances, your personal assets are shielded.

That protection extends to situations where an employee, business partner, or the business itself is sued for negligence.

Along with shielding your personal assets, an LLC can protect control of the business resulting from a lawsuit. For example, let’s say you and a partner own an LLC together. Your partner has trouble docking his new boat and damages the slip at the marina. The marina owner sues your partner and wins.

The marina owner can seek to receive your partner’s share of the profit distributions from the LLC. However, unlike with an incorporated business, the marina owner cannot gain any control over the management or operation of the LLC.

While that’s not a great situation for your partner, it does help protect your interest in the business.

Protecting your LLC with business insurance.

How you structure your business is just one way to protect you financially. While starting your business as an LLC shields your personal assets, there’s not much protecting all that you’ve worked for in your business. You could still find yourself on the hook for accidents or negligence by you, your employees, or the LLC.

However, business insurance can protect your LLC from a variety of risks.

For example, a plumber is doing light repairs to the pipes in a customer’s remodeled bathroom. Unfortunately, he doesn’t secure the caps as tightly as he should have, which causes considerable water damage in the new bathroom.

The plumber’s general liability insurance policy could cover the $7,500 cost of repairing the water damage. The only out-of-pocket expense the plumber likely has is the insurance policy deductible.

Without this protection, the plumber would have had to pay the entire $7,500 out of pocket, plus any legal fees if the customer were to sue for additional damages.

Sometimes, something can go wrong with the advice you give or service you provide. Say you’re a tax accountant and you inadvertently place the decimal point incorrectly on a Form W-2. A while later, the client gets audited by the IRS and sues for your error and the additional IRS fees. Professional liability insurance can protect you and cover some, if not all, of your legal fees.

We can help you understand what type of coverage you may need, which we’ll find for you from top insurance carriers. Simple. It’s even in our name — Simply Business.

Plus, with general liability policies starting as low as ** $19.58/month,* ** it’s affordable to get the protection your LLC needs.

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2. Less paperwork.

Even in the digital age, it’s impossible to escape paperwork (just think of the nearly yard-long receipts you get at the drugstore or grocery store).

While there are documents to file with government agencies and licenses to apply for when you start an LLC, the day-to-day operation of your business needs a minimal amount of administrative work.

That’s especially true when compared with other forms of businesses, such as a corporation, which is required to publish annual reports, hold stockholder meetings, and conform to specific and often ridgid management structures.

For an LLC, most states only require you to submit a report that includes the LLC name, address, and your LLC number, as well as your registered agent information. The report is required to keep your LLC in good standing with the state and ensure it hasn’t been dissolved.

Here’s the good news. Depending on the state, you’ll only be required to file reports annually. In some states, it can be every two or even ten years. Either way, you won’t be chained to your desk.

3. Tax advantages.

There’s a lot of flexibility with how an LLC is taxed. For tax purposes, the IRS views an LLC as a sole proprietorship (if there is only a single member) or a partnership (multiple members). This allows for “pass-through taxation.”

With pass-through taxation, the profits from an LLC pass through to your individual tax return and are taxed at your individual income tax rate.

In both instances, if you expect to owe at least $1,000 in taxes, you likely will need to pay quarterly Estimated Tax payments to the IRS. If you have employees, you’ll need an EIN (employer identification number), and you’ll need to withhold and pay payroll (FICA) taxes on the employees.

Here’s why an LLC can have tax advantages over an incorporated business. A standard corporation gets taxed twice. The first tax is on the company’s profits. The second levy is on the dividends that go to shareholders (which likely would include you).

There are other tax options you can consider for your LLC. Depending on elections made by your LLC and the number of members it has, your LLC can be treated as either a C Corporation or an S Corporation. This could help reduce your self-employment tax burden.

As with many considerations related to taxes and finance, the right choice often depends on specific aspects of your business, including state and local tax requirements. So it’s a good idea to consult an accountant, tax, or financial professional.

4. Flexible profit distribution.

We’ve covered the ways LLC profits can be taxed, but another benefit of an LLC is how profits can be shared among multiple LLC members.

In most states, a member’s profit allocation matches their stake in the LLC. For example, if you have 60% ownership in the LLC, you’re entitled to 60% of the profits. This differs from a partnership, where each partner generally shares equally in the profits.

Certain states allow profits to be allocated in ways that don’t have to match ownership percentage. For instance, you may decide that members who contribute cash rather than property or services, should get a higher profit percentage, or vice versa.

Having options is a good idea. To make sure the option you choose is right for you and your business, we recommend that you speak with a business attorney, accountant, or other financial professional.

5. Flexible management.

One of the reasons people start their own businesses is to be their own boss and run their operation the way they see fit.

While traditional corporations must follow a certain structure (a board of directors, a chief executive officer, and other senior managers), an LLC has more freedom and leeway in how it’s set up and run.

The LLC’s operating agreement spells out who is managing the business and what their specific roles and responsibilities are. All of the LLC members can be managers, or they can elect one member to handle the management of the business. They can also hire managers who aren’t LLC members.

This flexibility also extends to voting rights. Much like profit allocation, voting rights do not have to be in proportion to ownership.

Just as importantly, the operating agreement is not cast in stone. It can be amended and changed to meet the needs of the business as it grows and matures.

6. Brand power and financing.

Being a small business doesn’t mean you need to be seen as a “small” business. Another benefit of an LLC is that it lets you create a name for your business that can help you stand out, especially if you’re in a crowded field or marketplace.

Most states require that you include the words ”limited liability company” or “LLC” as part of your name. That can be an advantage. It helps convey that you’re a more formal business structure than a sole proprietorship. You look more like a bigger fish in a bigger pond.

There’s also a more practical reason. An LLC is seen as a business entity, which can give you more credibility with lenders and investors. It also has advantages in attracting and landing new business. Going after larger customers often involves contracts and meeting specific vendor requirements. In some instances, you may need to be an LLC to be considered.

An LLC is often seen as being a more reliable, responsible business partner than a sole proprietor. That can be important for your customers. It shows the IRS and other government agencies that you’re not an employee of that corporation.

That's often important for larger customers who need to clearly differentiate employees from contractors to ensure their records accurately reflect paying the correct payroll taxes and other benefits.

Do I Really Need the Benefits of an LLC?

The benefits of an LLC — much like those of owning a timeshare in the Bahamas — may seem irresistible at the time. However, it’s a good idea to consider a few factors to determine if an LLC is right for your business.

You also should weigh the benefits of an LLC against the time, costs, and additional recordkeeping involved with getting an LLC up and running. For some businesses, it makes sense right off the bat. For others, moving to an LLC is part of a business’s growth.

Three Signs an LLC May Be Right for You

1. You have more at stake.

Some businesses come with more risk than others (e.g., an excavation contractor vs. a math tutor). Also, as your business grows, more customers and bigger contracts can add to that risk.

That’s true for even the most conscientious and professional business owners. A 2005 study found that 90% of businesses end up with a lawsuit at some point in their life span.

With an LLC, typically only your business assets are subject to claims and legal judgments against your business.

For even more peace of mind, take a look at how the right business insurance can eliminate a lot of worry.

2. You’re making more money.

This is a very good thing, but you want to keep as much money as you can from your hard work. As we’ve mentioned, an LLC may offer more tax advantages than a sole proprietorship.

For example, you may be able to elect to treat your LLC as an S corporation to lower your FICA tax. Talking with a tax professional who understands your particular business can provide more insight regarding this.

3. You’re working with bigger customers.

If the majority of your customers are businesses rather than individuals, looking more like a business can give you some added credibility.

Being an LLC can also make it easier to get through the vendor approval process you’ll likely run into with business and corporate accounts. In fact, it may even be required.

Protecting Your Business with LLC Insurance

Whether you form your LLC on day one or as your business grows, it makes sense to protect what you’re building. That’s why we’re here.

At Simply Business, we make it fast and easy to protect all that hard work by helping business owners like you to find the LLC insurance coverage they need. We’re also here for you as your business grows and changes with advice and insight on ways to improve your coverage and get the most for your money.

Plus, with general liability policies starting as low as $19.58/month,* it’s affordable to get the protection your business needs.

* Monthly payment calculations (i) do not include initial premium down payment and (ii) may vary by state, insurance provider, and nature of your business. Averages based on January - December 2020 data of 10% of our total policies sold.

Ed Grasso

Written by

Ed Grasso

As a 9-year-old at summer camp, I hated it — especially after being pulled screaming from the pool during the swimming competition. While this left me without an aquatic achievement patch, it also inspired the letter to my parents that got me an early release from Camp Willard. That showed me the power of writing. I’ve done my best to use it only for good ever since, such as writing helpful articles for small business owners.

Ed writes on a number of topics such as liability insurance, small business funding, and employee management.

This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer

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