Main Advantage 1: NO double taxation
LLCs are comparatively new, that is corporations have existed for centuries, LLCs were first introduced in 1977 (in Wyoming). LLC’s offer two main advantages: The owner(s) will be taxed like a partnership, that is, no double taxation. When you set up a C-corporation, your profits are taxed twice. Take Nike for example. After Nike made 20 $ for selling you a shoe, Nike, Inc. is going to pay taxes to the federal (and maybe state) government. When they distribute their profits to their shareholders, you, the shareholder have to pay taxes on the dividends you received. Unfair, but current tax law. A partnership or an LLC do not pay taxes, rather they inform the government how much they made and who the individuals behind the partnership or LLC are, who are going to include the income on their tax returns. This way, the members of an LLC only pay taxes on the LLC or partnership profits once. Paying taxes is already bad enough, but only paying once instead of twice, is certainly an advantage.
Main Advantage 2: Protection from Personal liability
The second advantage is, that owner’s are protected from personal liability. A sole prorprietor is when you run your shop as yourself, maybe you give yourself a trade name (“doc’s candy store, Mary Ann’s foot massage, the cleaning wonder”) but all your bank accounts are in your name and you sign all contracts in your name. If you are a sole proprietor, you are personally liable. Someone slips and falls in your candy store and a mean attorney sues you and gets a million dollar verdict against you, you are going to pay with your car, your house, your stamp collection and your first-born (OK, maybe not your first-born). When you set up an LLC, only the LLC assets are subject to liability, which means, the lawyer getting the million dollar judgment against your business can only sell off the assets of the LLC. IN this case you might keep your house, your car (and your first born).
Why do not more people set up LLCs ?
There is some paperwork to set up, a little more paperwork at tax time and to maintain the status as a company. Paperwork is always unpleasant since it distracts you from your main business: making money. However, a little paperwork goes a long way to protect you against disasters.
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