Advantages of an LLC or S Corporation for Your Small Business
Small businesses are the backbone of the American economic system. There are many different business types, each of which is has its own separate legal and tax implications. Most small businesses are sole proprietorships by default because it does not require the filing of any paperwork. A sole proprietorship is by definition an unincorporated business that is owned and run by one individual. There is no distinction between the business and the individual owner. Its revenue is filed on the owner’s personal income taxes, and the owner is entitled to all the profits of the business. However, the owner is also personally responsible for all business debts and liabilities. For this reason, anyone operating a sole proprietorship should consider exploring converting to a limited liability company (LLC) or an S Corporation.
Advantages of Forming an LLC or S Corporation:
Personal asset protection
Both an LLC and an S Corporation offer the small business owner personal asset protection, as it limits the owner’s personal liability with respect to business debts and legal obligations if the company is sued.
Protecting Your Brand
In most states, a business cannot register or use the trade name of another business. Forming an LLC or S Corporation protects your brand by preventing competitors from using that same name and/or brand. Additionally, adding “Inc.” or “LLC” to your business name can lend your business additional credibility.
With a sole proprietorship, once the owner dies, the company dies. Forming an S Corporation or LLC allows the company to continue existing if the ownership changes.
Aside from personal asset protection, potential tax savings are one of the key advantages to forming a LLC or an S Corporation in lieu of a regular corporation. Both LLC and S Corporations allow profits to be taxed at lower personal rates, as opposed to corporate rates, with S Corporations also allowing the owner to pay even less taxes on profit distributions issued in the form of dividends. Consult with your tax advisor when deciding whether an LLC or S Corporation is more advantageous from a tax perspective.
The formation of an LLC or S Corporation imposes certain obligations upon the owner, and there are many issues and variables that a small business owner needs to consider before determining which corporate structure is appropriate. Accordingly, an attorney should be consulted. When finding an attorney to help you with your small business needs, post a short summary of your legal needs at www.legalserviceslink.com, and let the perfect attorney come to you!
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