Sometimes a hobby, side hustle, or freelance gig can become so successful, the natural next step is to turn it into its own official, legal entity. For anyone looking to take their venture to the next level, the limited liability company (LLC) structure is a natural choice. Indeed, since its inception in the late 1970s, the LLC has consistently been the most popular legal structure for a business in the United States.
Many successful entrepreneurs have found the LLC structure to be highly effective, providing them with the flexibility and risk mitigation tools necessary to achieve their goals. If you’re on the fence about starting your own LLC, it may be helpful to reflect on some key insights from business leaders who have found the LLC structure to be valuable.
What is an LLC?
To begin with, a quick definition is in order. The LLC is a legal structure that creates a clear demarcation between the business and the business owner. In doing so, the LLC protects business owners from being personally responsible for company debts or legal issues.
Starting an LLC is generally considered to be quick and affordable, though there are a few administrative steps required. For example, most states require the designation of a registered agent, often from a professional service like Northwest Registered Agent, to receive important legal and tax documents on the business’ behalf.
Why Do Entrepreneurs Value the LLC?
Successful entrepreneurs have discovered that the LLC structure offers a number of undeniable benefits. Here are a few of the most noteworthy ones.
1) It takes very little time to form an LLC.
While the requirements for forming an LLC vary on a state-by-state basis, it usually consists of assembling some paperwork, submitting it online, and paying a nominal fee. Many entrepreneurs are able to get their LLC up and running within just a few hours’ time.
There are some additional, ongoing requirements for maintaining an LLC, but these, too, are pretty tame. Most states require a brief annual report and a nominal fee, all of which can be taken care of in a single sitting.
2) An LLC limits personal liability.
Of course, the primary benefit to the LLC is how it creates a legal distinction between business and owner, which affords a certain level of legal liability.
Here’s what it means in actual practice. Assume someone brings a lawsuit against your LLC. They may be able to seize some of your business assets, but not the assets that you own personally. Your family car, and the bank account you share with your spouse, are off the table. Similarly, these personal assets are shielded from any creditors to whom your LLC owes money.
There are rare occasions on which a court might “pierce the corporate veil,” making your personal assets seizable in order to settle business debts, but these cases are rare indeed, and usually involve fraudulence on the business owner’s part.
3) An LLC gives you tax flexibility.
It’s hard to find success as an entrepreneur without being serious and intentional about tax planning. This is another area where the LLC structure earns its stripes.
The default tax status for an LLC is to be taxed just as a Sole Proprietorship would be taxed. This means that, as an LLC member, you claim a certain portion of the profits on your personal tax returns, but you do not file a corporate tax return. As such, the LLC prevents “double taxation” on the same set of income.
Having said that, the LLC also provides flexibility: Entrepreneurs who want to opt into the corporate tax rate have the option of doing so.
4) Having an LLC boosts credibility.
There’s another important reason why many freelancers and side giggers choose LLC status in order to make the jump to “real” entrepreneurship. That reason is simply that being an LLC confers a certain level of professionalism and respectability.
Once you have an LLC, you can have people write checks and submit payments to the business, rather than to you as an individual. This helps establish the business as something credible and trustworthy.
5) LLCs can more easily qualify for business loans.
Most entrepreneurs need to seek external funding at some point, and having an LLC can make it much easier to bring in the capital you need.
That’s because LLCs can qualify for a broader range of small business loans, with less onus placed on the credit history of the individual business owner.
It’s true that the LLC does not allow for selling shares, and as such, bringing in venture capital can also be a struggle. For these kinds of funding, incorporation is necessary. Yet compared with other legal structures, the LLC does provide some clear avenues for getting a loan or a line or credit.
6) LLCs have ample freedom when it comes to management.
How do you want to run your business day-to-day? Do you want to be in charge of everything yourself? Do you want to bring in a partner, sharing in management responsibilities as well as profits? What about hiring a professional management team?
All of these options are on the table when you start an LLC, because this legal structure has been left deliberately open-ended when it comes to day-to-day administration. Entrepreneurs are free to write orders of operation that denote the specific way they want managerial functions to be distributed.
Also note that, unlike with Corporations, LLCs do not require things like annual shareholder meetings. To put it another way, entrepreneurs who want to run their business without encountering a lot of red tape will usually find the LLC to be the ideal option.
LLCs are an Outstanding Option for Enterprising Entrepreneurs
Launching a new business venture requires the careful selection of a legal structure, and of the many options, the LLC is widely perceived to be the most flexible and the most advantageous. Explore specific LLC requirements in your state to determine whether this is the right channel for your entrepreneurial dreams.
Author Bio
Amanda E. Clark is a contributing writer to LLC University. She is a graduate of Eastern Michigan University and holds degrees in Journalism, Political Science, and English. She became a professional writer in 2008 and has led marketing and advertising initiatives for several Fortune 500 companies. She has appeared as a subject matter expert on panels about content and social media marketing. She regularly leads seminars and training sessions on trends and tactics in professional writing.
