When starting a new business, one of the first question that might arise, “What is an LLC, and do I need one?” A limited liability company (LLC) is one of the most popular ways to organize a business because of the tax benefits and personal liability protection it offers. Many business owners choose an LLC because it requires less paperwork and is relatively easy and affordable to set up compared to C-corporations and S-corporations.
What Are the Benefits of Registering as an LLC?
Aside from the tax and liability protection benefits, there are several reasons why business owners choose an LLC:
- It’s easy. Usually, business owners can file for an LLC on their own without an attorney’s help. The fastest way to do it is online through the Arizona Corporation Commission (ACC).
- LLCs are inexpensive to file with the state. Arizona charges a one-time fee of $50 online for a regular filing or $85 for an expedited filing.
- Management structures are flexible. LLCs aren’t required to have a board of directors. They can be member-managed and operate independently.
- There is far less paperwork. Corporations are usually required to keep and file compliance-related documents, while the record keeping requirements for LLCs are minimal.
- Credibility is a key benefit to forming an LLC. Rather than a sole proprietorship or partnership, an LLC shows clients you’re serious about your business.
- Business owners will not be held personally liable if their business is sued or goes into debt. LLCs protect the owner’s personal assets, like their house, car, retirement accounts and savings. If a business is sued and loses, it’s the LLC’s assets that are used to settle judgments.
- The way an LLC is taxed is up to the business owner. Unlike corporations, LLCs have the freedom to choose to be taxed as a sole proprietor, partnership, S-corporation or C-corporation.
Does Having an LLC Make a Financial Difference?
By forming an LLC, two benefits that directly impact a business or business owner’s finances are personal liability protection and flexible tax options.
- Personal Liability Protection: When an LLC is formed, personal liability protection takes immediate effect. It is possible for business owners to lose this protection if they pierce the corporate veil (i.e., what separates the owner from the entity). This can happen if a business owner commits fraud and mixes the LLC’s assets with their personal finances. If the corporate veil remains intact, it reduces financial risk and limits losses for the business owner. If the LLC owner decides to sell it in the future, transferring ownership is easy. Shares cannot have transferring or selling restrictions.
- Tax Benefits: LLCs benefit from pass-through taxation, meaning owners avoid double taxation and can potentially save a substantial amount of money. An LLC’s earnings can be passed directly to the business owner(s) without having to pay corporate federal income taxes. Instead, the owner is taxed based on their personal tax rate. LLCs have the flexibility to choose how they report their income and pay taxes. This is where filing as a sole proprietor, partnership, S-corporation, or C-corporation can make a difference — an LLC can be filed as any one of these. Each has its own unique tax ramifications. Keep in mind that an LLC owner still has an obligation to pay income taxes; it’s just at the owner’s individual tax rate.
Seek Help with LLC Navigation in Phoenix, AZ
Navigating the entrepreneurial world can be overwhelming, especially in the early phases of starting a business. Fullerton Financial Planning offers a number of financial services to help small business owners in Arizona manage their finances and achieve their financial goals. Call us at (623) 974-0300 to get started.
