Even if it’s a small startup, running your own business is no easy task, especially since there are numerous factors you need to consider to keep everything running smoothly. You also need to ensure that every decision you make benefits your business and works well towards your established business goals.

In this case, one of the significant decisions you need to consider when you’re a small business owner is whether or not to transition from a sole proprietorship or general partnership and incorporate your business as an LLC.

Sole proprietorships and general partnerships tend to be popular among small businesses because of the flexibility these legal structures give them. However, turning it into an LLC can actually offer you so much more, especially in terms of your long-term business goals.

So, why exactly should you form an LLC for your small business? Discover the top 4 reasons and benefits in this article.

LLC Business Structure – What Is It?

Before we discuss the reasons, let’s take a quick look at what an LLC is first. Simply put, LLC is an acronym for “Limited Liability Company.” This is a hybrid business structure between sole proprietorships and corporations.

What does that mean? It means that it offers the best of these two legal structures, which is perfect if you’re looking to protect your business like corporations while retaining all the perks of more informal business structures.

LLCs for Small Businesses – 4 Reasons to Incorporate as One

So, why should you form an LLC for your small business? Isn’t a sole proprietorship enough? Let’s find out with these 4 reasons.

1. Liability Protection for Your Assets

One of the most significant reasons you should form an LLC for your small business is the fact that LLCs offer you limited protection against liabilities. What does this mean? It means that forming an LLC means establishing your business as a separate legal entity from your own, which entails keeping your company’s assets apart from your personal ones.

As a result, you have a safety net for your personal assets, which means even if your business runs into some legal or financial trouble, your personal assets like your car or house can’t be used to pay off debts or legal expenses for the company.

With an LLC, you won’t have to worry about becoming bankrupt if your business runs into some legal or financial trouble. This business structure is also ideal if your business is in a high-risk industry.

2. Easy Formation and Management

Another reason you should form an LLC for your business is because it’s relatively easy enough to establish one. You can either file your business as an LLC yourself or avail of the many incorporation services available online. 

Aside from that, the turnaround time for forming LLCs is relatively quick as well, with some states taking as short as 7 to 10 business days to process your application. Take note that the exact duration depends on your chosen state of incorporation.

LLCs are also easier to operate than corporations especially when you create an LLC operating agreement, so you don’t have to worry about exerting more effort managing one. You can choose to manage it yourself or assign managers to do so on your behalf. 

3. Tax Benefits

LLCs also enjoy enticing tax benefits, much like sole proprietorships. In fact, even if you’ve already established your small business as an LLC, you can still enjoy the benefits of pass-through taxation.

This means that all your business profits are filed with your personal income tax returns, and the taxes are deducted at individual tax rates. As a result, you can avoid experiencing double taxation, even if you enjoy the liability protection that corporations have.

Aside from that, you can also file with the IRS so that your LLC will be taxed as an S-Corporation instead. This means you retain your pass-through taxation status without being subjected to taxes for Medicare or Social Security.

4. Boosted Credibility

Last but not least, one of the most significant reasons you should form an LLC for your small business is the added credibility it gives your business. Incorporating as an LLC allows you to establish your business as a legitimate one, which increases its overall trustworthiness and credibility among customers and potential investors.

You can also gain more convenient access to additional funding because you can now open a dedicated bank account for your business. In fact, this can also benefit you as an individual because a dedicated account will help separate your company’s finances from your own.

This can also make it easier to keep track of your business’s transactions and allow you to organize your company’s financial information more efficiently.

Forming an LLC for your small business gives you the best of both worlds – the flexibility and tax benefits of sole proprietorships and the protection against liabilities of corporations. Incorporating as an LLC also establishes your business as a legitimate one, making it more attractive to potential investors and customers alike.