If your business loses money, often your tax burden would be considerably less if you're simply a sole proprietor. According to Cairns, the LLC is considered a pass-through entity for tax purposes, "meaning any profits or losses are directly passed through to the owner, partners or shareholders as income." With an LLC, you may be eligible for additional tax benefits. Ultimately, LLCs offer more freedom in how the business can be run. If you have a corporation, there are more rules, such as needing a board of directors to develop policies and make sure they're carried out. With an LLC, you'll also have added flexibility. Still, there is documentation, such as possibly having to file annual reports, associated with LLCs. Without a separate entity for each one, a lawsuit from one can reach into your other ventures," DuFord says.Īnother bonus of forming an LLC is less paperwork than when filing as an S-Corp or a C-Corp. "I'd also recommend this to an entrepreneur with multiple businesses. But "if your product or service is something that touches people, involves consuming food or beverages or involves kids, then you should absolutely have a business entity set up because the liability risks are high," says Craig DuFord, co-founder of DuFord Law, which specializes in business law and is based in San Diego. Granted, you may have a business that isn't likely to hurt anyone and come to the conclusion that you don't need to form an LLC. If something goes wrong, and you are sued, your personal assets would have more coverage from being taken by creditors. There are several advantages of forming an LLC over, say, remaining a sole proprietor. Keep in mind, however, it is more difficult to turn a C-Corp into an LLC or S-Corp without unfavorable tax consequences. Plus, if your business takes off, and you're extremely profitable, you can create an LLC, S-Corp or C-Corp later on. "Most form either an LLC or an S-Corp," Cairns says. Few small businesses form a C-Corp due to its complexity in rules, fees and paperwork, according to Brian Cairns, CEO of ProStrategix Consulting, a business management consulting firm in New York City. You can list yourself on your tax-filing as a sole proprietor, which involves no special paperwork, or your company could become an S-Corp or a C-Corp. When creating an LLC business structure, you have a number of options.
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