As a business owner just starting out, one of the most important decisions you will face is deciding how to structure your company. The formation type you select may affect everything from how and how much you pay in taxes to your personal liability. While some options may suit certain businesses, others may not best serve them or their operational objectives.
Understanding the potential benefits of structuring as a limited liability company may help you determine if it is the right structure type for your business needs and goals.
According to the U.S. Small Business Administration, structuring as an LLC may limit your personal risk. With few exceptions, as an LLC owner, your personal assets such as homes, vehicles and banking accounts cannot be accessed to satisfy your businesses’ liabilities. For example, should your LLC have to file bankruptcy, you may not have to use your personal finances to pay off any outstanding debts to creditors. Likewise, should your LLC get sued, the plaintiff cannot recover compensation via your private assets.
Like sole proprietorships and partnerships, state and federal governments do not directly tax LLCs. In lieu of paying corporate taxes, as you would if structured as a corporation, the profits and losses of your LLC pass through to your personal income. Combining your company’s tax obligations with your own prevents you from double taxation, which the owners of corporations may sometimes face. You should keep in mind, however, that as the owner of an LLC, you may qualify as self-employed. As such, you may have to pay Medicare and Social Security self-employment taxes.