If you own a business or have a side hustle, starting an LLC for your venture can be a good idea.
A limited liability company, or LLC, is a common business structure. It is simple to form and is inexpensive. Furthermore, it doesn’t change the way you operate your business.
Benefits of starting an LLC
1. Liability protection
The primary reason for starting an LLC is to protect your personal liability.
Say your business is sued. If your entity is set up as a sole proprietorship, there is no legal distinction between you and your business. As a result, your personal assets are at stake, even though the “business” is what’s being sued.
Forming an LLC creates a separate entity, thereby providing some protection to the owners of the company. However, an LLC won’t shield you from everything.
For example, a bank might require a personal guarantee for a loan your business takes out, or a landlord might do the same on your lease, especially if your business isn’t well established. If any fraudulent activity occurs, your LLC won’t protect you there either.
2. Tax benefits
I normally say that an LLC by itself doesn’t give you tax benefits. This is true—an LLC is considered a “pass-through” entity. Business income is passed on to the owner’s taxes. But creating an LLC gives you an additional option for tax filing. You can elect to be taxed as an S-Corporation.
People who file as an S-Corp normally do so to save on self-employment tax. The self-employment tax rate is 15.3% and funds Social Security and Medicare. Any earnings are subject to this self-employment tax. However, income from a corporation is not, making it attractive for business owners who have a good amount of business income that is being distributed.
However, the decision on whether to elect an S-Corp tax status should be sought with the help of a tax advisor.
How to start an LLC
Starting an LLC isn’t difficult! For more information, watch our One-Minute Money Tip “How to Start an LLC in Arizona” here or on our YouTube channel.
