Starting A Business In 2022: LLC VS Other Structures
Is An LLC Business Structure Right For You? Let’s Find Out
If you are thinking about launching your first business soon- or have already launched it but have recently begun to expand significantly, you may be wondering what the best entity status to register your organisation is.
According to statistics from the U.S Census Bureau, a very high proportion of entrepreneurs start their business whilst utilizing a DBA (Doing Business As) status; this then commonly develops into a: sole proprietorship, general partnership, or a Limited Liability Company (LLC).
Below we will discuss the benefits of LLCs in comparison to other common business entity types- such as Sole Proprietorships, Corporations, and Partnerships, and attempt to conclude what the best business entity is for small businesses in 2022.
Types of Businesses
In the U.S, there are a variety of different business entity structures that you can choose to register your business as- all involving different advantages and disadvantages.
One of the most simple options- that doesn’t require you to incorporate your business (which involves significant legal rigmarole and federal scrutiny) is choosing to work under a DBA status. Even though a small certification process is required for this, depending on your state a DBA may be a legal prerequisite to registering your business as an LLC- meaning that it may be a good start for individuals who have large expansion plans.
Registering your company as a sole proprietorship is another great- yet simple, choice, as this can provide a plethora of structural, managerial, and financial advantages depending on your business’s industry and size.
Whilst sole proprietorships remain the most common business entity according to government data, their inability to provide business owners with limited personal liability is one of their greatest downsides in comparison to LLCs and Corporations.
It may also be worth noting that, even though incorporating your business has traditionally been a benefit that could only be enjoyed by business owners that could afford specialised tax attorneys, the rise of incorporation service providers has meant that- to a certain extent, individuals have in the last couple of years been able to reap the prolific benefits of LLCs and Corporations without having to commit themselves to the traditionally tedious and complicated incorporation process.
Advantages of an LLC
As hinted above, one of the most significant benefits of Limited Liability Companies is that they offer ‘’limited liability’’ under the law- also known as LLC insurance. This means that LLC owners’ personal assets will not be subject to any compensation or reimbursement claims that arise in a court as a result of their business accruing significant debt in the future and declaring insolvency.
Of course, this benefit is not unilaterally applicable, as exceptions do exist. For example, where a business owner has personally guaranteed a loan to a financier, or where the way in which an LLC is run and managed is done so in a way that is pragmatically identical to that of a sole proprietorship, limited personal liability will likely be revoked- and fines can even be imposed by government bodies such as the IRS.
LLCs additionally provide a plethora of tax advantages for their owners. Following the introduction of the Tax Cuts and Jobs Act , these benefits have increased significantly.
As LLC owners can choose to: a) leave the majority of the profits to the company, b) pay themselves an annual salary, or c) distribute dividends (distribution of the profits), they also retain a very high level of financial flexibility which can undoubtedly play a vital role in a business’s long term sustainability and growth.
For relatively small businesses which are not generating a significant amount of revenue, registering as an LLC business may not be the most ideal option, as the tax benefits gained via incorporation may not outweigh the costs of the registration process.
Overall, finding the most suitable business entity structure for you will (unsurprisingly) depend on your business’s size, industry, and managerial preferences. Industry specialists- such as The Really Useful Information Company (TRUiC) can additionally be used as a robust ‘’guide’’ for starting entrepreneurs, allowing them to make calculated, informed business decisions.