Probably the most obvious advantage of forming an LLC is the protection of your personal assets by limiting liability to the resources of the company itself.
In most cases, the LLC will protect your personal assets from claims against the company, including lawsuits. There is also the tax benefit of an LLC.
An LLC, or limited liability company, is a US business structure that combines the simplicity, flexibility and tax advantages of a partnership with the personal liability protection of a corporation.
The owners of LLCs are called members. An LLC may have one or more "members", the official term for its owners. Members can be individuals or other businesses, and there is no limit on the number of members an LLC can have.
With an LLC structure, the members' personal assets are protected from the company's creditors. The members are not personally liable for the actions of the company.
This means that members' personal assets - houses, cars, bank accounts and investments - are protected from creditors trying to collect from the company. This protection is maintained as long as you run your business properly and keep your personal and business finances separate.
Unless you choose otherwise, an LLC is a pass-through entity, which means its profits go directly to its members without being taxed by the government at the company level. Instead, members pay taxes on the profits on their own federal income tax returns.
This makes tax filing easier than if your business were taxed at the corporate level.
If your business loses money, you and the other members can take the hit on your own tax returns and reduce your tax burdens.
Members can manage an LLC, allowing all owners to share in the day-to-day decision making of the business. They can also manage the company as professional managers, who can be members or outsiders.
This is useful if the members want to hire people with more experience in running a business. In many states, an LLC is managed by its members by default, unless explicitly stated otherwise in documents filed with the secretary of state or equivalent agency.
The initial paperwork and fees for an LLC are relatively light, although there is a wide variation in what states charge in fees and taxes. The process is simple enough that owners can carry it out without special knowledge, although it is a good idea to consult an attorney or accountant for help.
Ongoing requirements are usually annual.
A judge may rule that your LLC structure does not protect your personal assets. This action is called "piercing the corporate veil," and you may be at risk if, for example, you do not clearly separate business and personal transactions or if you run the business fraudulently in a way that causes losses to others.
The IRS considers LLCs to be partnerships for tax purposes, unless the members elect to be taxed as a corporation.
If your LLC is taxed as a partnership, the government considers the members who work for the company to be self-employed. This means that those members are personally liable to pay Social Security and Medicare taxes, collectively known as self-employment tax, based on the total net income of the business.
If your LLC files forms with the IRS to be taxed as an S corporation, you and the other owners who work for the business pay Social Security and Medicare taxes only on your actual compensation rather than on all of the business's pre-tax profits.
In many states, if a member leaves the company, goes bankrupt or dies, the LLC must dissolve and the remaining members are responsible for all legal and financial obligations necessary to terminate the company.
These members can continue to do business, of course; they will just have to start a new LLC from scratch.
Anyone starting a business, or currently running a business as a sole proprietor, should consider forming an LLC.
This is especially true if you are concerned about limiting your personal legal liability as much as possible.
It is not necessary to have a formal business entity to start and run an online business, but forming an LLC can provide you with some important benefits.
Forming a business entity such as an LLC or corporation is almost never a bad idea, but it is not always an absolute necessity for solo business owners.
LLCs limit the liability of the owners. If the business goes into debt or bankruptcy, neither owner is personally liable.
Therefore, if two people open a bakery together, structure it as an LLC and it goes bankrupt or is sued, the owners will not lose their homes or other personal property in the process.
There are exceptions, especially when the business owners commingle business assets and finances with personal assets and accounts.
And for individuals who are also their entire business, a single-member LLC (SMLLC) is a great place to start.
Creating a limited liability company (LLC) is the best business structure for most small businesses because they are inexpensive, easy to form and simple to maintain.
The main reason to create an LLC for moonlighting is if you want the additional personal liability protection that an LLC offers.