Why an LLC Can Be an Option for Young Managers
If you do choose to form a business, choosing a limited liability company (LLC) as your business entity type is likely to be your best option. LLC formation is not a difficult process, but first, you should understand the benefits of an LLC.
What Is an LLC?
An LLC is a business entity that offers personal liability protection for owners, and more flexibility than a corporation, particularly in terms of taxes. The LLC does not pay taxes. It is considered a “pass-through” entity, which means that income passes through the business to the owner or owners, who report it on their personal tax returns.
With an LLC, you can choose your management and operational structure. Your LLC can have a single member or multiple members, all of whom have personal liability protection, meaning that your personal assets are not at risk if you cannot pay business debts or are involved in a lawsuit.
Benefits of an LLC
Simplicity
LLC formation requires much less paperwork than forming a corporation. You just need to file articles of organization with your state and draw up an operating agreement that defines member ownership, how profits are distributed, and member roles and responsibilities.
Unlike a corporation, no annual meetings are required, and an LLC doesn’t need a board of directors. In some states, however, you do have to file an annual report for an LLC, but it’s a very simple form.
An LLC with a single member also does not need an Employer Identification Number (EIN) unless it has employees.
Credibility
An LLC has the advantage of having more credibility with customers and vendors than a sole proprietorship. People may perceive an LLC more as a real, established company rather than a one-person show.
Limited Personal Liability
Unlike a sole proprietorship, an LLC is considered a legal entity that is separate from you, the owner. This means that you are not personally liable for the company’s debts or legal liabilities, so your personal assets are safe.
In a sole proprietorship or general partnership, your personal assets including your home are at risk if there are unpaid debts or legal liabilities.
There are some instances when an LLC owner, however, could have personal risk. For example, if you are asked to personally guarantee a business loan, you are personally liable for the debt because of that personal guarantee.
Tax Benefits
An LLC is considered a “pass through” entity, which means income passes through to the owners for tax purposes. The LLC is not a taxable entity, so all income is reported on a Schedule C of the tax return of the owner or owners and taxed at their personal income tax rate.
This is different than a corporation, which is a taxable entity, and dividends that shareholders receive are also taxed. This is sometimes referred to as double taxation.
LLC owners also may be eligible for the 20% pass-through deduction that was part of the Tax Cuts and Jobs Act, meaning that they can deduct up to 20% of the business income.
An LLC, however, can choose to be taxed as a corporation if it is determined to be beneficial to the company. This may occur when the LLC reaches a certain level of income.
Flexibility in Profit Sharing
Most LLCs split profits based on the percentage of capital contributions by the owners. In a partnership, profits are generally divided equally. Corporations pay dividends based on the ownership percentage of the shareholders.
With an LLC, however, the owners can specify any profit-sharing structure they choose in the LLC operating agreement. This may be done in a case where one owner is more involved in the operations of the business than others, and therefore receives a higher share of profits.
In Closing
As a young manager, you’re already well on your way to success. As you think about your future, consider the benefits of having your own business and being in control of your own destiny. You’re learning the necessary skills already. You just need to do a little homework, come up with a great business idea, and you’ll be on your way to entrepreneurship!