LLC Formation and How It Can Maximize Your Business Potential

Why you should look into LLC formation

Whether you are a sole proprietor running a small business or part of a partnership or simply someone looking for ways to invest some resources, looking into Limited Liability Company options would be a very practical move.

What is wrong with sole proprietorships and partnerships?

Partnerships and sole proprietorships are fine but they may not have the features you need to further maximize your business. Partnerships and sole proprietorships do not offer limited liabilities on business losses and debts. This allows banks and other creditors to go after your assets outside the company. You may even lose everything to creditors collecting on debts.

Another thing about these types of businesses is the taxation. You are paying more taxes that you really have to. You have to pay for the typical income tax on the business income and also an additional self employment tax. That basically is the tax on all the profits you make on the business. A lot of people actually pay more for self employment taxes than federal taxes.

How does LLC formation fit in all of these?

You can set up your business as a Limited Liability Company (LLC). Doing this will give you the advantage of having limited liabilities on potential debts and losses suffered from the company's business dealings. One other thing you can get out of this is tax advantages. A limited Liability Company allows its owners to decide how their business will be taxed. This gives business owners the freedom to choose options that can save them the most money in taxes. A Limited Liability Company with a single member can be counted as a C corporation or an S corporation, not just a sole proprietorship. As for LLCs with more than one member, they can be counted as a C or S corporation besides being a partnership.

A C corporation is any corporation that is taxed as a separate entity from its members. An S corporation on the other hand is a corporation that has pass through taxation. The taxes pass directly through and the members pay amounts proportional to their stakes in the company.

How will this reduce taxes?

Why settle for being a sole proprietor and continually pay self employment taxes when you can instead set up a Limited Liability Company to run your business. Take advantage of the tax scheme options and have your LLC treated as an S corporation for pass through taxation. This means that you will never have to pay self employment taxes again.

Opting for the LLC to be treated as a C corporation gives a different sort of advantage. This will allow owners to utilize various corporate perks in terms of tax free benefits to themselves. This move will save lots of tax money in the long run.

Is LLC formation hard to undertake?

Not really. Most states only have five required steps in setting up a Limited Liability Company. This can be done by the individual themselves or they can use readymade LLC incorporation kits. Some states even allow online filing. More often than not the entire process will take only a few days. Sometimes it can take weeks though.