5 Reasons to Start an LLC

A limited liability company (LLC) is one of the most popular business structures for small businesses. But why is this business structure so popular? 

LLCs offer a number of potential advantages over other business structures like sole proprietorships and corporations. In this article, we will go over five of the main reasons to start an LLC.

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What Is an LLC?

An LLC is a US business structure that combines the limited liability protection of a corporation with the simplicity and pass-through taxation of a sole proprietorship. 

Limited liability protects a business owner’s personal assets (e.g., car, house, and savings) in the event that a business is sued or defaults on a debt.

The main cost of forming an LLC is the state filing fee, which ranges between $40 and $500, depending on your state. 

There are two options for forming an LLC:

  • You can hire one of these Best LLC Services to set up your LLC (for an additional small fee)
  • Or, you can use our free Form an LLC guide to do it yourself

Reasons to Start an LLC

Limited liability companies (LLCs) are usually the best business structure for small businesses.

5 of the most important reasons to start an LLC:

  • Personal liability protection
  • Tax flexibility
  • Simplicity
  • Low cost
  • Credibility

Personal Liability Protection

Any business that has risk or liability, needs limited liability protection.

The main reason to start an LLC is that they give members personal liability protection. This means that an owner isn’t at risk of losing their personal financial assets if the LLC goes into debt or is sued. Sole proprietorships and general partnerships do not offer personal liability protection.

However, owners can lose their protection if they do something to pierce the LLC’s corporate veil. Some ways an LLC member can lose their personal liability protection include mixing personal finance accounts with business accounts and committing fraud. This is one reason that it is important to open a business bank account.

Tax Flexibility

As your business grows, it will benefit from having flexible tax options.

The default tax structure for LLCs is “pass-through taxation.” This means the LLC's profits and losses are not subject to any federal corporate income tax and instead pass through to each member’s individual tax return and are taxed at the owner’s personal tax rate. With pass-through taxation, the owners can avoid double taxation, which is not the case for corporations that have to pay a corporate income tax while the owners must also pay tax on dividends they receive.

LLCs can also choose to be taxed as either a C corporation (C corp) or an S corporation (S corp), which could be advantageous depending on the company’s specific situation. Visit our How to Choose a Business Structure guide to learn more.

Simplicity

LLCs are simple to start and maintain, which means you can focus on growing your business rather than jumping through the administrative hoops of a corporation.

You can form an LLC yourself without an attorney, but if you don’t feel completely comfortable with going through the process yourself and would like professional help, we’ve put together a list of the best LLC services that can assist you.

LLCs are also less regulated than corporations and have much less paperwork. LLCs don’t need to have a board of directors, keep meeting minutes, or hold shareholder meetings. This means much less time and money spent on keeping records and filing compliance-related documents after you’ve formed the company.

Low Cost

LLCs are a low-cost business structure that offer more benefits than any other structure.

Compared to corporations, LLCs cost less to start and maintain. The main cost of forming an LLC is the filing fee, which ranges from $40 to $500 depending on the state. You don’t need an attorney to start an LLC, which saves a significant amount of money. There is also generally less compliance paperwork to file after you form the LLC, which means fewer filing fees.

Sole proprietorships are low-cost upfront, but they don't protect your personal assets (which in the long run could be financially devastating.)

Credibility

Small businesses always benefit from the credibility an LLC provides. 

LLCs give a business more credibility than a sole proprietorship or partnership. Customers and other businesses will find an LLC more credible, and forming an LLC can show people that you are taking your business seriously.

How to Start an LLC

Reasons to Start an LLC FAQs

What are the benefits of an LLC?

Some of the benefits of an LLC include personal liability protection, tax flexibility, their easy startup process, less compliance paperwork, management flexibility, distribution flexibility, few ownership restrictions, charging orders, and the credibility they can give a business.

Learn more here: LLC Benefits guide.

How do LLC owners get paid?

LLC members get paid differently, depending on the LLC’s tax structure. Read our How Do I Pay Myself From My LLC? article for more information.

Is an LLC better for taxes?

LLCs are better for taxes for some businesses but not for all. Read our LLC Tax Guide for more information.

Do LLC pay more taxes than sole proprietorships?

LLCs and sole proprietorships have the same default tax structure. However, LLCs are also eligible to elect S Corp tax status, which could potentially result in them paying fewer taxes than a sole proprietorship, depending on the situation. 

Learn more here: LLC vs Sole Proprietorship guide.

Do I need an LLC if I am self-employed?

You don’t need an LLC if self-employed, but we recommend forming an LLC over a sole proprietorship because of the advantages that LLCs offer.

Learn more here: LLC vs Sole Proprietorship guide.

How is an owner's draw taxed in an LLC?

An LLC owner must pay Federal Insurance Contributions Act (FICA) self-employment taxes on their owner’s draw or distribution.

Learn more here: How to Pay Yourself From an LLC guide.

How do I create an LLC?

You can easily create an LLC yourself by using our free How to Form an LLC guide, or you can use an LLC formation service to register your LLC for you.

How much does an LLC cost?

The main cost of forming an LLC is the state registration fee, which is between $40 and $500, depending on the state. If you decide to use a professional service to help with the formation process, there will be added expense.

How are LLCs taxed?

LLCs are taxed differently depending on their structure. Taxation depends on if you operate a single-member or multi-member LLC as well as your LLC tax structure. 

Read our LLC Tax Guide for more information.

What is pass-through taxation?

Pass-through taxation is a system of taxation that generally applies to sole proprietorships, partnerships, LLCs, and S corps. In this system, the profits or losses of the business are not taxed at the business level. Instead, they pass through to the owners’ personal tax returns and are taxed at each owners’ personal income tax rate.

Read our LLC Tax guide for more information.

Where should I form an LLC?

You should form your LLC in the state where it’s located or conducts business. While certain states may have more business-friendly laws and policies, it becomes more complicated if the business is not actually located there.

Visit our Best State to Form an LLC guide to learn more.

Do I need a lawyer to form an LLC?

You typically don’t need a lawyer to form an LLC. You can easily create an LLC yourself by using our free How to Form an LLC guide, or you can use an LLC formation service to register your LLC for you.

Is it better to form an LLC or a DBA?

Your business’s unique situation and needs will determine whether it’s better to form an LLC or a DBA company. A DBA is a doing business as name and many sole proprietors choose to use a DBA name. In an LLC, you won't need a DBA because LLC formation registers your legal name with the state.

Read our DBA vs. LLC guide for more information.

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