Top 5 Reasons to Upgrade Your Business to an LLC or S-Corp

If you have a small business or are considering the start of a new business idea, there are some considerations that should be explored before you get too far into this tax year. Running a business can be fun and exciting (and hopefully profitable), so understanding what type of business to form is crucial in setting up protections for your new venture. Setting up a business can be done as a sole proprietor, corporation, partnership, and more. There are however some key reasons to consider upgrading your business filing to an LLC or an S-Corporation. In the following post we will identify the top 5 reasons you should consider updating your filings to one of these statuses for your business.
 
First, we want to identify what exactly is an LLC. An LLC is short for limited liability company. It’s a business structure that provides a business with limited liability (similar to a corporation), however the structure is easier to establish and easier to maintain ongoing. This is good to know as you consider the reasons to file as an LLC.
 
Reason 5: Provides Protection
 
When you operate a business as yourself (say you do freelance work), you take on all the liability. A client doesn’t like the work: they can go after you personally. Even if your business is a sole proprietorship or a partnership, you and your business are legally the same “person.” That means the debts taken by the business are also your personal debts. And if your business partner or employee is accused of negligence, your personal assets might be at risk.
 
With an LLC, it’s the LLC that is responsible for debts and obligations. Yes, you can lose the money you have invested in the company, however personal assets (such as a home) can’t be used to collect on business debts. In addition, your personal assets are protected should a business partner engage in some not so “above board” activity or there are any claims of business negligence.
 
Reason 4: Filing Return Benefits
 
Some tax fillings require an insane amount of extra business filings, tax forms, and separate taxes and fees to be paid. The IRS classifies an LLC as either a sole proprietorship or a partnership (depending on number of owners). That allows you to take advantage of “pass through” taxation, essentially meaning the LLC does not pay any LLC taxes or corporate taxes. In this case, the LLC income and expenses pass through to the owner(s) personal return and the owner(s) pays personal income taxes on the profits in that tax year.
 
Reason 3: Reduced Paperwork
 
Who doesn’t love paperwork? Ok, that was a trick question. Nobody loves taking on more paperwork than is absolutely mandatory. Some businesses who file as a C-Corp for example often have more paperwork than that of an LLC or S-Corp. For Corporations, they often have to have annual shareholder meetings, pay annual fees (which take forms to complete and submit), and intense record keeping requirements. The more requirements takes more paperwork which involves more time driven away from productive use of that time.
 
On the other hand, an LLC does not have these requirements. In some states, annual filings are not even required. Less filing leads to less wasted time when trying to operate a lean business.
 
 
Reason 2: Tax Advantages
 
Tax time is somewhat of a stressful time for many businesses. Paying taxes is even more stressful as it dips into the bottom line and creates less profit to grow the business. With a filing status such as a Traditional C Corp, these entities are taxed twice on distributions to shareholders. Yikes. That’s more to taxes than to business growth.
 
On the other hand, LLC’s and S Corps get the best benefits when it comes to taxation. An LLC doesn’t have their own federal tax classification, but can adopt the tax status of sole proprietorships, partnerships, S Corp or C Corp. In addition, an S Corp avoids double taxation and receive pass-through tax treatment. Much better.
 
Reason 1:  Flexible Profit Distribution
 
Our number one reason to consider filing as an LLC or S-Corp comes down to profits and how those can be distributed. Businesses exist for many reasons, and profits are one key reason.
 
An LLC has greater flexibility in the way they distribute profits to their owners, and they aren’t required to distribute them equally or according to ownership percentages. The flexibility in identifying the profits based on agreements between partners is huge when it comes to return in investments into the business. An LLC can for instance distribute more to a member who investment more into the startup costs, and then distribute the portion of profit based on the amounts designated early on.

Starting or running a business has some amazing benefits and perks. Creating a structure to safeguard, provide flexibility, and create an equal share of revenue distribution is key to ongoing success. There are several reasons to strongly consider upgrading to or filing as an LLC or S-Corp today.
 
Need help setting up your LLC or S-Corp? Visit our simple setup page here to learn how we can help get you running in no time.

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