Different types of business entities
Did you know that in the United States there are over twelve recognized kinds of business entities? Among these, the following six are the most common:
- sole proprietorship
- general partnership
- limited partnership
- limited liability company (LLC)
- C corporation
- S corporation
All these different entities play an integral role in the business world and each have different structures, but there are certain advantages of forming an LLC over other business entities. But what are the benefits of an LLC? LLCs are the most common kind of business entity — especially for startups — and thousands of business owners in the U.S. ask themselves “Do I need an LLC?” each year when they start to think about their business’ future. So, what are the advantages of an LLC?
1 LLC “Pass-Through” Tax Benefits
The most attractive benefit of an LLC is the pass through treatment it receives through the IRS. This means that the member, whether single or multiple, will be able to declare business activity on their individual tax returns. Compared to C corps and S corps, who pay taxes both at the business income level and each shareholder pays taxes on dividends received.
Apart from the advantage of avoiding the nightmare of double taxation, LLCs can choose how to be treated by the IRS. This is due to LLCs being a rather new entity which the IRS has yet to categorize. Therefore, if an LLC benefits more from a lower corporate tax rate by being treated as a corporation, then the LLC can make that election. However, this election would not permit the “pass-through” advantage.
2 Unbeatable Flexibility
The flexibility in managing LLCs are numerous, from less paperwork to member-managed profit sharing. LLCs are not required to elect boards, hold meetings, or enact bylaws. In fact, the only thing that corporations have in common with LLCs is that they both file articles of organization with the secretary of state. From that point forward, LLCs can structure how they manage their company using their Operating Agreement.
LLCs also maintain the flexibility on how to distribute its profits. In general partnerships, the partners distribute their share equally. In LLCs, the members choose which is the best manner to distribute profits, so long as making a distribution does not endanger the company’s solvency.
3 Advantages for Members
LLCs provide three specific advantages for the owners: no cap as to number of members allowed, you have foreign members, and other corporations can be members. Since LLCs permit nonresident aliens to be owners, this promotes business growth from individuals abroad investing their monies in the United States.
Learning about the advantages of an LLC is an important step when deciding whether forming an LLC is the right decision for you and the future of your business. Once you’re ready to take that next step and actually form one, an LLC formation service is one of the simplest, fastest and straightforward routes for those not familiar with the process.