Every year, there are new opportunities to grow your business. For many small business owners, now is the perfect time to consider forming a Limited Liability Company (LLC). The LLC has quickly become the most popular business structure for small business owners. According to the Delaware Division of Corporations, over 1.29 million LLCs are registered in Delaware alone as of 2021.
LLCs provide business owners with many significant benefits, from protecting their personal assets to potential tax savings. In this article, we give you 23 reasons why forming an LLC could be the smartest business move you make in 2023.
Why Form an LLC Reason #1) Personal Asset Protection:
The primary reason why business owners form LLCs is to protect their personal assets. When you form an LLC, it establishes your business as a separate legal entity, which protects your personal assets – like your home, car, and personal bank accounts – from business-related debts and liabilities. Forming an LLC can keep the creditors of your business from reaching into your own pocket.
Why Form an LLC Reason #2) Pass-Through Taxation:
The IRS treats LLCs as pass-through entities for federal tax purposes. Profits and losses pass through the business to the owners who report this information on their personal tax returns.
Pass-through taxation prevents the “double taxation” issue that some corporations experience, as it taxes profits only once, either at the corporate level or the shareholder level, but not both.
Pass-through taxation can help simplify business taxes for small business owners. According to the Tax Foundation, pass-through businesses, including LLCs, account for more than 60% of all business income in the U.S.
Why Form an LLC Reason #3) Flexible Management:
LLCs allow for flexible management structures. As an LLC owner, you can choose to manage the company yourself, appoint a manager, or even have multiple managers. With an LLC, small business owners can tailor their company’s management structure to meet the needs of their business.
A study published by the Society for Human Resources Management suggests that businesses with flexible management structures are better equipped to respond to changing business environments and may experience higher levels of growth.
Why Form an LLC Reason #4) Easy Formation Process:
Creating an LLC is a relatively simple and straightforward process. In most states, all you need to do is file an LLC formation document with the Secretary of State’s office and pay a filing fee. There is no requirement to complete complicated legal forms, making LLCs an attractive option for busy entrepreneurs and small business owners.
An online incorporation service, like IncNow, can complete the whole LLC formation process for you. They can also provide you with the necessary internal documents, like an LLC Operating Agreement, so that you can run your LLC properly. Delaware business lawyers prepare IncNow’s LLC Operating Agreements, and they come ready to sign.
Why Form an LLC Reason #5) Credibility:
Forming an LLC can potentially give your business more credibility. Having “LLC” in your company’s name shows customers, vendors, and partners that you are serious about your business and have taken the necessary steps to protect it legally.
Why Form an LLC Reason #6) Flexible Profit Distribution:
LLCs offer flexibility when it comes to distributing profits. In an LLC, Members can choose to distribute company profits in any way they prefer, while corporations typically require profit distribution based on the number of shares each shareholder owns. Flexible profit distribution can help small business owners implement more effective financial planning and facilitate growth.
Why Form an LLC Reason #7) Scalability and Growth Potential:
An LLC is an ideal choice for businesses expecting growth and expansion.. It is easy to make changes in an LLC, like adding new members or adjusting ownership percentages. This flexibility can make it easier to adapt to changes in the business environment and accommodate future growth. According to the Tax Foundation, LLCs outpace corporations when it comes to net income.
Why Form an LLC Reason #8) No Ownership Restrictions:
There are no restrictions on the number or the type of Members that can be included in an LLC. A Member in an LLC can be a U.S. citizen, a non-US resident, or even another business entity.
In comparison, U.S. corporations face some restrictions over who can have ownership in the company. For example, S-corporations have strict limits on the number of shareholders the company can have. In addition, non-US residents are not allowed to be shareholders in an S-corp.
Why Form an LLC Reason #9) Increased Privacy:
Some state laws provide LLC owners with more privacy than others. For example, Delaware does not require any information about the Members or Managers of an LLC to be made public. Business owners find this level of privacy increasingly attractive as instances of fraud become more prevalent.
Why Form an LLC Reason #10) Customizable Operating Agreements:
The LLC Operating Agreement outlines the roles, responsibilities, and decision-making processes within a Limited Liability Company. LLC Members can customize the Operating Agreement to best suit the needs of their business. A well-prepared LLC Operating Agreement provides Members with clarity on how the business is to be run and can help prevent business disputes.
Why Form an LLC Reason #11) Establish a Business Credit Profile:
An LLC can obtain a DUNs number and establish its own business credit profile. A strong business credit profile can make it easier for a business to obtain loans and credit lines without relying solely on the owner’s personal credit. The Federal Reserve reports that small businesses with a strong credit profile are more likely to access financing and receive favorable loan terms.
Why Form an LLC Reason #12) Continuity of Business:
An LLC has perpetual existence, meaning the business entity continues to exist even if the owner dies or leaves the business. Perpetual existence provides stability and continuity for an LLC, aiding its ongoing success. An article published by the George Washington Law Review found that businesses with a perpetual existence were more likely to experience long-term success by surviving economic downturns and better navigating ownership changes.
Why Form an LLC Reason #13) Access to State Incentives and Grants:
Many states offer incentives and grants to businesses that operate as LLCs. These incentives can include tax breaks, access to financing programs, and other resources designed to support small businesses. By forming an LLC, you may be eligible for specific benefits meant to help your business grow.
Why Form an LLC Reason #14) Easier Transfer of Ownership:
Transferring ownership in an LLC can be simpler than in other business structures. Members can join or leave an LLC by simply updating the company’s Operating Agreement. However, all LLC Members typically have to approve any transfer or sale of Membership interest.
Many LLC Operating Agreements include provisions, like Pick Your Partner or Right of First Refusal, that are meant to prevent unwanted individuals from buying their way into an LLC. The LLC Operating Agreement may give the company the right to buy back any membership interest before it can be offered to someone else. In addition, the remaining Members may be able to vote to reject an ownership sale.
Why Form an LLC Reason #15) Less Ongoing Paperwork:
LLCs typically have less ongoing paperwork and administrative requirements than corporations. For example, Delaware does not require LLCs to hold an Annual Meeting or complete an Annual Report. This can save small business owners precious time and resources, allowing them to focus more on growing their business.
Why Form an LLC Reason #16) Enhanced Collaboration Opportunities:
An LLC’s flexible ownership and management structure can make it easier to collaborate with other businesses, professionals, or entrepreneurs. This can lead to new partnerships, joint ventures, or other growth opportunities for your business.
Why Form an LLC Reason #17) Easier Succession Planning:
LLCs make transferring ownership simple, which is an advantage when it comes to succession planning. The LLC Operating Agreement can outline the process for transferring ownership interests, making it easier to pass a business on to the owner’s heirs in the future. According to Harvard Business Review, businesses with clear succession plans are more likely to successfully navigate generational transitions and maintain long-term success.
Why Form an LLC Reason #18) Simplified Annual Requirements:
In many states, LLCs have simpler annual reporting requirements compared to corporations. For example, in Delaware, LLCs only need to pay an annual fee in order to remain compliant. In contrast, Delaware corporations must hold an Annual Meeting of shareholders, file an Annual Report, and pay an annual Franchise Tax.
Maintaining an LLC is easy and can save you time and resources, allowing you to focus on running and growing your business instead of dealing with extensive paperwork.
Why Form an LLC Reason #19) Better Business Record-Keeping:
Operating as an LLC can encourage better record-keeping practices, as there are certain legal requirements regarding the documentation and maintenance of business records. This can help you stay organized and make informed decisions about your business. Better record-keeping practices enable small business owners to accurately assess their financial health and make better-informed decisions for the business.
Why Form an LLC Reason #20) Legal Compliance:
Forming an LLC ensures that your business is operating in compliance with state laws and regulations. This can help you avoid potential legal issues and protect your business in the long run.
Why Form an LLC Reason #21) Flexible Tax Treatment:
The IRS enables business owners to select the taxation method for their LLC based on the most beneficial structure for their business. The IRS “Check-The-Box” provisions let LLCs to choose whether they prefer S-corporation or C-corporation treatment for federal tax purposes.
LLCs are taxed as pass-through entities by default. However, LLC Members can choose to make a different tax election that is more advantageous to the company’s current situation. For example, an LLC can select S-corp or C-corp treatment for federal tax purposes by completing a straightforward tax election form.
This flexibility allows LLC owners to select the tax treatment that best suits their business needs and financial goals. Businesses with flexible tax treatment options are able to better optimize their tax strategies and reduce their overall tax burden.
Why Form an LLC Reason #22) Branding Opportunities:
Incorporating “LLC” into your business name can provide additional branding opportunities, leading to increased customer trust and loyalty. A strong brand identity is important for any business that is looking to attract and retain new customers to achieve higher growth and revenue.
Why Form an LLC Reason #23) Limited Liability for Members:
As the name suggests, an LLC provides its Members and Managers with limited liability protection. This means Member’s personal assets are generally protected from business debts and liabilities. Limited liability provides business owners with the protection and peace of mind that they need to commit to growing their business.
From personal asset protection and tax advantages to management flexibility and scalability, there are many reasons to consider forming an LLC for your business. By understanding the advantages of an LLC structure, you can make an informed decision about what’s best for your business and set yourself up for success in 2023 and beyond.
What is the Best State to Form an LLC?
Legal professionals and savvy entrepreneurs consider Delaware to be the best state to form an LLC. Delaware’s well developed business laws and dedicated business court are known for providing LLCs and their owners with the strongest legal protections anywhere in the world.
Top 5 Benefits of Forming a Delaware LLC
Benefit #1: Versatility
Delaware LLCs are versatile and work well for many types of business. From solo consulting ventures to multi-million-dollar properties, small time entrepreneurs and large conglomerates alike use Delaware LLCs for a variety of business purposes. Delaware LLCs are ideal for safeguarding tangible assets like real estate, as well as intangible assets like intellectual property or trademarks.
Benefit #2: Accessibility
Almost anyone (excluding individuals from certain restricted countries) can establish a Delaware LLC without living in or visiting the state. There is no residency requirement to open a Delaware LLC. All you need is to appoint a Delaware registered agent to represent your company. Delaware LLCs are widely recognized and can do business in any state or country.
Benefit #3: Low Startup Cost
Delaware has some of the lowest filing fees for LLCs. IncNow’s Delaware LLC packages start at just $9 plus state fees.
Benefit #4: Business Friendly Legal Environment
Delaware has a separate court, the Court of Chancery, dedicated to resolving business disputes. Judges in the Court of Chancery are experts in business law and are known for settling disputes efficiently and fairly.
Benefit #5: Privacy for Owners
Delaware does not require LLC owners’ names or addresses to be displayed on the state’s public database. The formation document for a Delaware LLC only needs to include the name and address of the company’s Delaware registered agent.