Starting a business and not sure how to structure it legally? There's no right or wrong option for any business, but a good option for many small businesses is an LLC (limited liability company).
From tax advantages to liability protection, there are many benefits to an LLC structure.
"[An LLC can be] a suitable and cost-effective alternative to other business models," said Jeramie DiBona, CPA and audit director at KAF Financial Group.
Here are four reasons you should consider choosing an LLC for your business.
1. It's flexible. With an LLC, you get the best of both worlds — the structure combines qualities from both partnerships and corporations into one entity, DiBona said. This gives your business a lot more flexibility. [What is an LLC? ]
"In nearly every state, you can form an LLC with just one person, but there's no limit on the number of members you can have," DiBona said. "In theory, all members can participate in managing the company."
2. It's low maintenance. Forming an LLC doesn't require many steps, either.
"It's fairly easy to form an LLC," DiBona said. "[First] you file an Articles of Organization form with the state and pay a fee."
You also have to create an operating agreement among the business's members, DiBona said. The operating agreement, he explained, establishes members' rights, percentage of ownership and share of profits.
3. You get favorable tax treatment. If your business has more than one member or owner, you can avoid double taxation with an LLC, DiBona said. This is because they can be treated as a partnership for tax purposes.
On the other hand, if your business has a single member or owner, it can be treated as a sole proprietorship for tax purposes, he said.
"In addition, LLCs, like S corps and partnerships, distribute income to their members, DiBona said, noting that LLCs do have to pay employment taxes for employees.
4. You get protection. While it doesn't offer blanket protection, with an LLC members aren't personally liable for the company's debts or obligations, DiBona said.
"Members may still be liable for debts if they personally guarantee them," he explained. "And they're liable for their own professional malpractice, if they personally injure someone, don't deposit taxes withheld from employees' wages, or use the company to conduct their personal business."
However, outside of those exceptions, members are only liable up to the amount of their capital contributions and the amount they agree to contribute to the firm's capital, DiBona said.
Originally published on Business News Daily.