Why an LLC is Best for Small Business

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 type of US business structure.

LLCs are the favorite business structure among small business owners because LLCs provide personal liability protection like 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.

LLCs can be owned by one or more people. An LLC with one owner is known as a single-member LLC, and an LLC with more than one owner is a multi-member LLC.

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

Why LLCs are the Best Structure for Small Business

Forming an LLC might not be the best decision for everyone but it is for the majority of small businesses, and there is a good chance that an LLC is the best structure for your business. 

This is because LLCs offer a variety of advantages that can benefit many different types of businesses. Here are the five biggest reasons to start an LLC:

  • LLCs provide personal liability protection
  • LLCs offer tax flexibility
  • LLCs are easy to form and run
  • LLCs are inexpensive to form and run
  • LLCs offer credibility

LLCs Provide Personal Liability Protection

The biggest benefit of LLCs is that they provide their owners (called members) with personal liability protection. This means that the member’s personal financial assets aren’t in danger if the LLC defaults on a debt or is sued.

Sole proprietorships and general partnerships don't offer this protection, which means a business owner could lose their savings, car, and even their house in the event of a business loss.

It is important to know that an LLC’s personal liability protection is not absolute. Members can lose this protection if they do something to pierce the LLC’s corporate veil. This includes things like mixing personal finance accounts with business accounts and committing fraud.

While not exactly personal liability protection, a related advantage of an LLC is the charging order. If one of the members has personal debts or owes a judgment from a lawsuit, their creditors may go after personal assets, which would include an ownership stake in any business. 

A charging order puts a lien on that member’s earnings from the LLC, but it protects the earnings and ownership stakes of the other members and also allows the indebted member to continue their role in the company without giving the creditor any power to run the business.

LLCs Offer Tax Flexibility

By default, LLCs are subject to “pass-through taxation.” This means that an LLC does not pay any federal corporate income tax, and instead, the LLC's profits and losses pass through to each member’s individual tax return and are taxed at the owner’s personal tax rate.

With pass-through taxation, LLC owners can avoid “double taxation.” This isn't the case for corporations, which have to pay a corporate income tax while the owners must also pay tax on dividends they receive.

Some LLCs might benefit from electing S corporation (S corp) tax status. This allows LLC owners to save money on taxes under the right circumstances.

Check out our LLC vs S Corp article for more details.

LLCs are Simple to Form an Run

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.)

LLCs Offer 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 Form an LLC

LLC is Best FAQs

What are the benefits of an LLC?An orange arrow pointing down

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?An orange arrow pointing down

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?An orange arrow pointing down

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

Do LLCs pay more taxes than sole proprietorships?An orange arrow pointing down

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?An orange arrow pointing down

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.

Can I 1099 myself from my LLC?An orange arrow pointing down

Yes, you can 1099 yourself from your LLC if you hire yourself as an independent contractor to perform work for your LLC. If you do that, the LLC would then issue you Form 1099-MISC. However, this is not the most common way that LLC owners pay themselves.

Check out our How Do I Pay Myself from my LLC guide for more information.

How is an owner's draw taxed in an LLC?An orange arrow pointing down

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?An orange arrow pointing down

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?An orange arrow pointing down

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?An orange arrow pointing down

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?An orange arrow pointing down

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?An orange arrow pointing down

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?An orange arrow pointing down

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?An orange arrow pointing down

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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