Why Are LLCs So Popular? 5 Reasons Entrepreneurs Choose Them

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Wyoming was the first state to allow limited liability companies in 1977 as a hybrid of a partnership and a corporation. It offered the asset protection of a corporation with the tax benefits of a partnership. It is now the most popular choice of business entity for small business owners.

Why Are LLCs So Popular?

Here are six reasons why business owners choose LLCs:

1. Personal Liability Protection

The number one reason LLCs are popular is that they offer limited liability protection to LLC members. A business owner operating a sole proprietorship is personally liable for business debts and lawsuits against the company, and their personal assets are at risk. Forming an LLC shields the business owner’s personal assets from the liabilities of the business. The owner must, however, take steps to separate business assets and liabilities from personal ones by opening a business bank account for the LLC and transacting business through that account.

2. Favorable and Flexible Tax Treatment

LLCs can be treated as pass-through entities for tax purposes. To illustrate, a small business owner with an LLC can record the LLC’s income on their personal tax return, avoiding corporate taxes, which is called “double taxation” commonly associated with C corporations. By default, the IRS treats a single-member LLC as a disregarded entity. If there are two or more LLC members, their share of income goes on their personal income tax returns, similar to a partnership. However, members can opt for their LLC to be taxed as a corporation if they wish, providing ultimate flexibility in a business structure.

3. Less Burdensome Requirements

While corporations, as legal entities, provide personal liability protection, they are more burdensome to create and maintain. A corporation must hold annual meetings and keep bylaws, annual reports, and minutes of meetings. LLCs do not require as much record-keeping, and there are no requirements for meetings and corporate minutes. LLC owners may want to create an operating agreement for their LLC, which is a framework for how the business will run and details the members’ ownership, rights, and responsibilities. While all LLCs should have operating agreements, only a handful of states require an LLC operating agreement.

4. More Flexible Management Structure

A corporation must have a board of directors and corporate officers. LLCs have fewer layers of management. A single-member LLC has only one member; for example, a sole proprietor who forms an LLC is a single-member LLC. For businesses with more than one member, it is a multi-member LLC. Multi-member LLCs may be managed by the members, which is called member-managed. The members participate in the day-to-day operations and can bind the company with their decisions. A manager-managed LLC appoints a manager or team of managers to operate the business. Other members of the manager-managed LLC may be silent partners and not have the same authority as the manager(s). Regardless of the number of members in an LLC, all members can receive pass-through taxation from the LLC.

5. Business Credibility and Branding

Many sole proprietors want to create an LLC with a business name and brand, not just their personal name. Who would you be more confident hiring to clean your car: Joe Smith or Xtreme Clean Auto Detailing LLC? LLCs create the perception that your company may be larger and more established than it actually is. Additionally, many companies want to work with LLCs rather than sole proprietors as independent contractors so they are not mistaken as employees by the IRS.

In addition to the above, an LLC offers many benefits for startup companies. LLCs are easy to form, and the filing fees are reasonable. You can file the forms online with your Secretary of State or with our trusted partner, LegalZoom. For complex questions about limited liability companies and their formation, consult a business formation attorney for legal advice.

6. Low Cost of Formation

It is easy to establish an LLC by filing articles of organization with the Secretary of State’s office in your state. Each jurisdiction has different procedures. Use this state-by-state guide for LLC formations. The formation and annual fees are relatively low. If you don’t want to do it yourself, you can hire a business attorney or use an online business formation service.

Why Are Delaware LLCs So Popular?

When considering LLCs, you may wonder why so many businesses choose to form their LLCs in Delaware. Delaware LLCs aren’t remarkably different than LLCs formed in other states. What makes Delaware famous for LLC formations and incorporations is the state itself and how it favors businesses. In fact, many businesses create an LLC in Delaware and then register their business as a foreign LLC to operate in other states. If the business does not have a physical presence in Delaware, they use a registered agent to represent their LLC in Delaware. There are four reasons why Delaware is popular for businesses:

1. Special Business Court and Settled Case Law

Delaware has a special Court of Chancery with unique jurisdiction to handle corporate, business entity, and equitable disputes. Judges with experience in complicated corporate matters hear cases without a jury. There is settled case law, so there is predictability in trial outcomes. If you operate a type of business that is subject to lawsuits, consider forming your LLC there.

2. Privacy

Delaware is a state that does not require disclosure of the LLC’s member or manager names in the formation documents, keeping the LLC members and managers anonymous.

3. Tax Advantages

Delaware does not impose income tax on Delaware LLC’s business profits if you do not operate in the state.

4. Minimal Requirements

Delaware does not require you to file annual reports for your LLC. The only requirement is to pay a business entity tax of $300 each year. The tax is due on or before June 1st of each year after the year of your LLC’s formation.

For almost 50 years, entrepreneurs, especially sole proprietors, have favored LLCs as their business entity of choice. They offer personal liability protection, flexible tax treatment options, less burdensome requirements, and a more straightforward management structure.

Do You Need A Lawyer to Form an LLC?

No, you can do it yourself. However, a lawyer can help with other business issues such as employment contracts, intellectual property, buy-sell agreements, and creating contracts. They are also helpful in keeping your LLC compliant to preserve your legal protections.