Many entrepreneurs prefer to form limited liability companies than other forms of businesses. LLCs can be created by an individual alone, by several people , or by other entities. The reason for the popularity of LLCs is the provision of limited liability. Customers cannot sue the owner for business issues, and creditors cannot seize the business owners’ personal properties to recover business debts.
Since forming an LLC is a lengthy and complicated process, you can work with LLC formation services if you wish to register one.
Here are some benefits of forming a limited liability company:
Corporations have a management structure that is fixed. It comprises a board of directors that oversees the company officers responsible for the business and its day-to-day operations. The shareholders or owners have to meet once a year to elect the directors who manage the company. LLCs are not obligated to use the formal structure. Owners can freely decide on how to manage their business.
Flexible Profit Distribution
LLCs are flexible in the way profits are distributed among the owners. They are not required to have equal distribution or according to the percentage of ownership. An example is where people might have equal interests in LCC but agree that one will get a more significant share of profits since he contributed more labor or money in the business’s startup phase. On the other hand, corporations must distribute their earnings to the owners according to share numbers and types.
Tax Advantages of an LCC
Since they don’t have a separate tax classification, LLCs can adopt the tax status of partnerships, sole proprietorship, or corporations. They are often automatically classified as sole proprietorships or partnerships if they have one or two owners, respectively.
Therefore, these companies can benefit from pass-through taxation, meaning that they don’t have to pay corporate taxes or LLC taxes. Instead, the income and expense of LLC pass through the personal tax returns of the owner.
Corporations have limited liability, but numerous requirements have to be met that might not work well for a small business that is informally run. For example, corporations have to hold annual meetings of the shareholders, make yearly reports, etc. The record-keeping of corporations is also substantial. On the other hand, LLCs do not have annual meetings.