There are so many questions to ask yourself when you first make the choice to become self-employed. Some of those choices are easy, others are hard, some are simple and again others may be complicated - but navigating these decisions is an excellent proving ground for how ready you really are to be an independent.
One of the most popular questions you may find yourself pondering is how you should structure your business.
There are may avenues - C-Corporation, S-Corporation, Sole Proprietorship, and LLC, among them.
Today, we explore the pros to becoming a Limited Liability Company, or LLC.
An LLC allows for pass-through taxation while also giving the limited liability of a corporation.
But what does that mean?
Pass through taxation is most commonly found in partnerships or sole ownership scenarios where the generated income flows directly to owners (or investors) out of the entity that is creating it. That means the income is treated as the direct income of the owners\investors and thus taxation "flows through" to another tax return.
Limited liability is when a person's financial liability is limited to a fixed sum, such as the value of a persons stake in a company. This status is most often seen in legal cases when, if a limited liability is sued, the plaintiffs are technically suing the company and not the owners\investors themselves.
Benefits of an LLC
By breaking the idea of an LLC down in to these two parts, the benefits are immediately clear. Having an LLC will allow you to avoid having to file self-employment taxes as well as a need for annual reports. LLC's create several tax options for entrepreneurs or partners to take advantage of, creating a greater sense of flexibility.
Beyond taxes, the LLC also offers a relief from individual liability. The coverage of the limited liability, as we discussed earlier, protects a business owner or investor from being directly litigated. Although recent conduct clauses do not guarantee this liability 100%, they do allow for a "corporate veil" that can act as a major relief. A business operator can maintain their company without constant fear of being personally sued.
All of these points show that most of the time, creating an LLC is a very beneficial move for a self employed individual.
That said, it is good to keep in mind that this is still a very new type of categorization. The rule and regulations regarding them are still actively being worked on and refined. These regulation and/or requirements may also change state by state.
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News and notes for independent professionals and their clients. This is the October 17, 2016 edition.