One option for business owners to consider: limited liability companies, which can choose individual or corporate tax status.
LLCs offer other advantages: They’re often easy and inexpensive to set up -- just a few hundred dollars. Moreover, they have many of the benefits of a corporation, including limited legal liability for owners, the ability to accommodate investors and partners and easy transference of ownership, offering an exit.
The simplicity and benefits of LLCs are spurring more businesses to set them up. “Is there a growing trend? Yes. The growing trend for the last few years has been the limited liability company,” says Gene Fairbrother, a small business consultant for the National Association for the Self-Employed.
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From 2003 to 2008 in Florida, for example, the share of businesses created as LLCs rose from 27% to 52%.
The tax advantages of an LLC are easy to see. Unlike corporations, LLCs are what’s known as pass-through entities and are not subject to income tax. Owners of corporations, by contrast, are subject to double taxation -- on the corporation as well as on the shareholder.
The business structure carries many of the legal benefits of a corporation. Forming an LLC “is the cheapest security that you can buy,” says Fairbrother. It can shield a business owner from a range of suits brought against a firm’s products or employees. And it can provide protection for personal assets for loans made to the LLC.
Because of their liability protection and structure, LLCs are also more attractive to investors, says Fairbrother. “The LLC is a good vehicle when you’re looking at investors because it allows you to set up a partnership. But it doesn’t go into complexities” like a corporation, he says. There is no limit to the number of partners, or members, as they are called, who can join an LLC. Plus LLCs can be owned by another business, unlike a sole proprietorship.
LLCs are also easy to transfer. When a sole proprietorship is sold, technically the original business comes to an end and a new business starts. Consequently, any licenses or permits as well as any legal agreement in the name of the previous business owner must be redone to reflect the new business owner. In the case of an LLC, on the other hand, when the business is purchased, the new owner becomes a member. Any assets and legal items in the name of the LLC remain with the business. Compared with a sole proprietorship, the process is nearly seamless.
Thinking about an LLC? Check with a tax attorney or accountant to determine if it’s the right choice for your business. “The key factor, and this is so critical and important to the issue, is that absolutely nobody can suggest the best legal and tax structure for a business without doing an individual evaluation of that business, period,” says Fairbrother.
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