The Benefits of Forming A Limited Liability Company

By Daniel Gillie - Favor Legal Senior Associate

Limited Liability - It’s In The Name.

Limited Liability Companies serve as a shield to your personal assets. That means, if your business gets sued, and loses, your personal assets are protected. If you are a business owner running your business as an unincorporated sole proprietorship, your personal assets such as your house, car, investment accounts, bank accounts, and any other holdings are up for grabs should you get sued and lose in court. Creating and maintaining a Limited Liability Company is one of the cheapest and best forms of protection you can use.

Deducting Startup Expenses

Another benefit of forming a Limited Liability Company is the ability to deduct startup expenses for your business, no matter how the LLC is set up. These startup expenses include things like advertising campaigns, buying equipment, materials, training new hires, traveling expenses, and more. Basically, if it’s an expense that you need to get your business off the ground before your first sale, there is a high likelihood it’s deductible.

Choosing How You Are Taxed

When you form your LLC, you get to choose how you are taxed. Depending on your situation, you can elect to be taxed in one of several ways.

Sole Proprietorship

The default choice for an LLC. The IRS considers this type of LLC a disregarded entity. The owner of the LLC will only pay taxes on the income tax earned. This is a form of passthrough taxation.

Partnership

Multi-Member LLCs are treated as a partnership by the IRS. Just like a sole proprietorship, LLC taxes pass through to the owners of the multi-member LLC. When taxes are filed, a schedule K1 is distributed to each member for them to report their annual share of profits and losses on their individual tax return.

C-Corp

Electing to be taxed as a C-Corp will require some extra filing, and any income earned will be taxed twice. Once at the corporate level, and then again after being distributed to shareholders. However, the benefit is, dividends distributed to shareholders are taxed at a very favorable rate.

S-Corp

An S-Corp is another type of pass through tax entity. The important thing to know about S-Corps is that taxes are assessed at the owners’ individual tax rates.

Non-Business Uses: Personal Asset Protection

For those with investment portfolios, an LLC is a great way to protect your assets from potential liability. Accidents happen, and that means that before they do, you need to ensure that your assets are protected. Forming an LLC can protect your assets from accidents in your personal life. If you happen to be involved in an auto accident or home injury claim, any assets you have that are not under an LLC are able to be seized should your policy not cover the full amount of what is owed to the other party. Why take the chance? It is better to have protection and not need it, than to need protection and not have it.

Final Thoughts

LLC’s are cheap protection for your business and your personal assets. The safe and responsible thing to do to protect you and your loved ones is to ensure that your assets are shielded. Let Favor Legal help get your LLC off the ground today!

For educational purposes only. This article does not constitute legal advice. For legal advice, consult a licensed Texas attorney.