Advantages of Starting Your Small Business as an LLC
When you establish a small business, one of your most important decisions is the legal structure of the business. In Arizona, you can choose among a number of legal entity options. For many new small business owners, an LLC or Limited Liability Company is an excellent choice. An LLC has advantages over other structure choices for a business, particularly in terms of liability and taxation.
Liability Protection for LLC Members
Just as the name implies, an LLC provides liability protection for a business owner, which some other types of structures do not. Personal assets of an LLC member (the term used for an LLC owner) cannot be reached by creditors in most circumstances. An LLC member is not responsible for business debts. This protection is one of the most important advantages of using a Limited Liability Company structure for your business.
The liability protection of an LLC is a significant difference from a sole proprietorship or partnership, in which the personal assets of the owners are at risk. An LLC provides protection similar to that of a corporation, but the LLC structure is very different from a corporation.
Taxation of LLC Members
Forming an LLC provides flexibility in choosing how to file tax returns and pay taxes on business income and profits. Initially, an LLC does not have a separate identity as an entity for tax purposes. Profits go directly to members, who report and pay tax on their own income tax returns. Members are also responsible for paying self-employment tax on business net earnings. However, LLC members can elect a different method for paying taxes and filing tax returns.
A single-member LLC elects to pay taxes like a sole proprietorship, an S Corporation, or a C corporation. The IRS default option is sole proprietor taxation. The LLC member can change the status to file as a corporation either during formation of the LLC or afterwards, by filing a form with the IRS.
If an LLC has multiple owners, the members decide collectively whether to report profit and losses for tax purposes as a traditional partnership or as a corporation. The IRS automatically classifies some LLCs as corporations.
If LLC members decide to choose corporate reporting, the LLC files and pays taxes like a corporation. In that case, the company also pays the members’ employment taxes on their compensation. Members may choose between reporting as an S corporation or as a C Corporation. To implement the choice, the members create an Operating Agreement, which includes terms relating to the LLC’s tax reporting. For more information about tax status for an LLC, please read our separate article, Should You Choose S Corporation Taxation for your LLC?
LLC Operation and Management Flexibility
An LLC is relatively easy to set up, if the required documents are properly completed and filed. On-going paperwork requirements are minimal, especially compared to some other types of business structures, like corporations.
LLCs are governed by an Arizona state law that changed substantially in 2019. However, unlike a corporation, an LLC is not subject to complex rules and regulations. A multi-member LLC has significant flexibility in setting up management of the company.
LLC Credibility and Identity
Generally, an LLC is perceived as a more formal business structure than a sole proprietorship or partnership, which can be an advantage in relationships with customers, clients, and other businesses. The ability to register a unique name for the LLC also enhances branding and marketing opportunities.
Is an LLC the Right Choice for Your Small Business?
Starting a new business is an exciting time. You should make sure you start on a solid foundation by talking with an experienced business law attorney who can help you determine whether an LLC is the best choice for your business structure. In some situations, another type of legal entity may provide important advantages.
Your business attorney helps ensure that you take all the legally required steps to establish your business, which relieves you of much of that burden. Your lawyer also makes certain that you know how to implement the business structure and comply with on-going legal requirements. As your business gets underway, your lawyer can help with matters involving day-to-day business operations as well, such as making sure your business contracts fully protect your interests.
Longer term, a business law attorney can help with business planning as you grow and expand, ensuring continuity of a family business through business succession planning, and protecting your business in your estate plan. Your lawyer can also help if merger or sale possibilities arise.
For more information about starting your new business, we invite you to read our article, The Best Way to Start a Small Business in Arizona.
Schedule a Free Consultation With an East Valley Business Law Attorney
In our business law practice at Peterson Law Offices, we help small businesses choose the right legal structure. We also help our business clients on an on-going, as-needed basis with day-to-day operations matters and longer-term concerns.
We understand that small businesses, whether new or established, often do not need a full-time lawyer but do need reliable, responsive legal counsel throughout the life cycle of the business. Our goal is to help your business succeed, grow, and thrive. We provide high-quality legal services at affordable prices. Your first consultation is always free of charge.
We welcome inquiries from clients throughout the East Valley, including Queen Creek, San Tan Valley, Gilbert, Mesa, and Chandler. Schedule your free initial consultation by calling 480-878-5998 or using our online contact form.
