If you are like many startup business owners, cash is tight and you are careful about how you spend it. However, making the decision to form an LLC could save you money, headaches and personal liability. Here are 5 reasons that forming an LLC is important:
1. LLCs provide a personal liability shield for you and your family.
Without an LLC (or similar form of entity) you will be personally liable for the debts of your business. This means that the supplies you order, your advertising, and the service contracts that you enter into for your business are all your personal debts. If these companies ever have to collect, your personal assets are at risk. By forming an LLC and running it properly, you can limit the exposure of your personal assets. This becomes even more important when you consider risk from accidental causes, such as a car accident in a company vehicle, or a slip and fall in your office. Forming an LLC is a great way to minimize these risks and liabilities.
2. Credibility, credibility, credibility.
People want to deal with a business that appears to be professional and well established. One way to show this is to form an LLC. Doing business as an LLC conveys a message of permanency. On the other hand, doing business under your own name says to your clients that you have not taken the time to establish the business, and you may not have your whole foot in the water. Given the relatively low cost of forming an LLC, it is an easy way to show your customers that you are serious about your business.
3. An LLC business offers tax flexibility.
Depending on how you elect to be taxed, an LLC can be taxed either as a partnership or as a corporation. What works best for you will depend on many factors, including how you plan to pay yourself. The basic choices are to let the LLC be a pass through entity, meaning that the LLC’s receipts will be taxed to you as personal income, or to be taxed as a corporation. Being taxed as a corporation allows you to have more separation between yourself and the LLC. It also allows you to pay yourself through a combination of W2 wages and dividends, giving you more flexibility from a tax perspective.
4. LLCs allow you to establish credit for future business needs.
If you form an LLC, you won't need to rely solely on your personal credit. Instead, you can slowly build credit under a separate Taxpayer Identification Number for your business. Applying for a credit card or a similar form of credit and paying it off regularly is a great way to begin establishing credit that could be helpful to your business purchases in the future.
5. LLCs permit flexible ownership between you and your current or future co-owners.
An LLC business can provide you with the flexibility to create unique ownership structures for you and your co-owners. For example, each owner can have a different number of membership interests, and your governing documents can provide structure for how you pay the members.
Depending on the size of your business and your desired structure, an LLC can range from very inexpensive to create, to a moderate business expense. However, for the reasons I list above and many others, forming an LLC or other business entity is vitally important to your success, and your protection if your business fails for some unexpected reason.