One of the first decisions a new business owner has to make is determining the company’s business structure. For some small business owners, a sole proprietorship seems to be the best option, but this might not be the case.
Many don’t realize they can have considerably more protection if they establish their company as a limited liability company. While this takes a bit more work to set up than a sole proprietorship, many find the benefits far outweigh that little bit of work.
1. Separation of personal and business assets and liabilities
The most significant benefit for someone who establishes an LLC instead of a sole proprietorship is that an LLC can be structured so that it provides a clear division between the owner and the business. This means that if the company is sued, the owner isn’t at risk of losing their personal assets to the lawsuit. A lawsuit’s award can only come after the business’ assets. Companies that are at higher risk often find this protection valuable.
2. Pass-through taxes
Handling taxes for an LLC doesn’t have to be complicated. The LLC is a pass-through entity for taxes, which means you can simply claim the profits and losses on your personal tax returns. Some business owners don’t want that to occur. They have the option to file the company’s taxes as a separate entity, but that’s not required.
Ultimately, you have to do what’s best for you and your company. Working with someone who understands the risks of the company and your goals for your own assets is beneficial. If you opt to establish the business as an LLC, ensure you have the documentation filled out and submitted correctly.