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.