What Are the Benefits of Forming an LLC?
A limited liability company, commonly known as an LLC, is a form of business that protects its owners, members and itself from certain legal liabilities. It’s like a compromise between a partnership and a corporation in the sense that it possesses a pass-through tax status like a partnership, yet offers limited-liability protection like a corporation.
Members of LLCs are not held personally responsible for the actions or debts of the company, meaning that a business lawsuit will not result in a personal car or home repossession. However, an LLC cannot protect members from personal liability for their own wrongdoings, in which case, their assets may be at risk in a lawsuit.
Forming an LLC also involves considerable tax benefits, which, when paired with the limited personal liability exposure mentioned above, often makes it a more favorable option than incorporating. A single owner of an LLC is taxed as a sole proprietorship; owner compensation in the form of distribution of profit is taxed at the individual owner’s marginal tax bracket (which is potentially lower than that of the business itself). The pass-through tax status can also offset any of the owner’s other nonbusiness income.
An LCC with multiple owners still offers similar tax benefits, along with the added benefits of a corporation. Owners can elect to have their LLC taxed as a partnership or as a corporation.
Even with limited personal liability, it’s still important to insure LLCs as you would insure a corporation. Property and liability insurance are business standards that are often enhanced with additional coverages such as lost income, commercial auto, umbrella, data breach, equipment breakdown and worker’s compensation. Your local agent can help you select a comprehensive policy that meets the needs of your LLC.