Is There a Financial Benefit to Forming an LLC?

Many small business owners question whether or not they should form an LLC (a limited liability company). Aside from being seen as “official” in the eyes of the government, what do you stand to gain? And even then, why not go the corporation route?

LLCs are a popular choice among small business owners because they provide tax benefits and flexibility, while also limiting the owner’s liability, as the name implies. In this article, we’ll cover the financial benefits of forming an LLC, as well as key points to consider.

3 Primary Benefits of Forming an LLC

1. Protecting Your Personal Assets

By forming an LLC, you limit your liability as far as your business is concerned. Your personal assets are no longer part of your business; therefore, you’re placing the liability only on the business itself in the event of a lawsuit or other related issue. You can achieve a similar result by forming an S or C corporation, but small business owners appreciate avoiding the complex processes and high fees.

2. Bolstering Your Reputation

Having an LLC tacked onto your business name not only adds credibility with the government but also with fellow business owners and customers. The official status shows good faith—that you’ve gone the extra step and that you’re committed to the business. It will also allow you to more easily pursue business bank accounts, credit cards, and loans you may need to scale your business efforts.

3. Having Tax Flexibility

Small business owners enjoy the tax flexibility that comes along with an LLC. Depending on the number of members (i.e., owners), you have four options for how the government will tax your business.

4 Tax Options for Filing with an LLC

1. Sole Proprietorship

Apparent in the name, a sole proprietorship is a single person who owns an LLC. Choosing this option would mean that you would report the business’ profits and expenses on your personal tax return.

2. Partnership

As you most likely guessed, a partnership applies to an LLC with two or more members. Similar to a sole proprietorship, the LLC is not taxed on its income. Instead, the members are taxed based on their portion of the income and expenses.

3. C Corporation

An LLC is a great way to avoid the double taxation that occurs with a C corporation. However, because you’re able to choose how your business is taxed, a C corp is still an option. With this type of taxation, the business is subject to a corporate tax on its earnings and you are responsible for paying taxes on any distributions you receive. The possibility of having the business’ income taxed twice steers many business owners away from choosing a C corp.

4. S Corporation

An S corporation is taxed similarly to a sole proprietorship and a partnership. With this option, the responsibility for taxes on the LLC’s income passes through to its members. You do not have the possibility of double taxation with this option.

For a full explanation from the IRS on how LLCs are taxed and which forms you will need to complete for each one, take a look at Publication 3402.

Note: Keep in mind that if you are a single-owner business, you would choose from options 1, 3, and 4. If multiple members own your business, you would choose from options 2, 3, and 4.

Take Control of Your Business’ Financial Journey

It’s easy to feel as though your business and personal finances are one entity or that you’re wrestling in chaos to keep it straight, much less plan a strategy. A financial advisor can help small business owners plan for their ideal future. Keeping your personal finances in mind, an advisor will create a comprehensive, long-term financial plan that creates a clear path.

Find an advisor you trust to give you the financial tools for success. Southwestern Investment Group’s family of advisors focuses on holistic planning, taking every piece of your financial standing into account to help plan a course of action.

Contact us to begin planning the best version of your financial future.

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