Six Reasons Every Small Business Should Consider an LLC

A traditional corporation usually doesn’t make sense until a small business has become, well, rather big. But a limited liability company, or LLC, often does make sense even for small businesses for at least six reasons …

Reason 1: Easy Setup

An LLC is easy to setup. In many states, you only have to fill out a rather simple, one- or two-page form. That’s it. Sometimes, you can even prepare and submit this form online.

Reason 2: Low Cost

In most states, although not all states, an LLC is quite economical. To setup an LLC, you often pay between $100 and $200. And then on an annual basis, you probably pay another $100 or so.

Running your business as a limited liability business, therefore, costs about the same as other “maintenance-type” business expenses: setting up and using a bank account, getting letterhead and business cards, and purchasing accounting software.

Be sure to check the setup fee and annual cost for your state, however. Some states, like California, charge way too much for the privilege of running your business as an LLC. (In California, the annual cost for even a very small business runs around $1,000.)

Reason 3: Protection

Typically, a big reason that any business owner or investor sets up a corporation or forms a limited liability company is asset protection. And you do get good asset protection with an LLC. Arguably, you may even get better asset protection with an LLC than you do with a regular corporation. But read my next point for more discussion related to this point…

Reason 4: Minimal Red Tape

A traditional corporation requires quite a bit of red tape and legal fiddle-faddling. You need to setup a board of directors, have regular board of directors meetings, schedule and hold annual stockholders meetings, and so forth. Predictably, you’ve also got a bunch of paperwork to prepare and archive related to these tasks.

With an LLC, you don’t have to do this stuff.

With an LLC, by the way, you will have or should have an operating agreement that describes how the LLC operates and how LLC owners (who are called members) interact with the LLC.
And now a tangential comment that some attorneys make: Honoring the paperwork formalities is easier with an LLC than with a regular traditional corporation. Which means that you may get better liability protection with an LLC than you do with a regular corporation just because an LLC is easier to setup and operate correctly.

Reason 5: Simple Accounting

An LLC often doesn’t have to complicate your accounting. Here’s why: An LLC with one owner is disregarded, or ignored, for income tax accounting purposes. For example, a one owner LLC operating an active trade or business reports its income and deductions on Schedule C—which is the same way that any sole proprietorship reports its income and deductions.

Similarly, a one owner LLC investing in stuff (like real estate, say) reports its income and deductions on Schedules A, B and E—which is the same way that other “unincorporated” investors report their investment income and deductions.

Just so you know why this simplicity is significant, if you setup a regular corporation to operate your business or invest, that corporation owes its own, separate tax return. An additional tax return, of course, complicates your accounting. But it gets even worse—at least from the perspective of a small business.

A corporate tax return typically requires a business to supply quite a bit more accounting information—for example good balance sheets as of the start and end of the tax year. And that means the business will have to do better but also more complicated bookkeeping.

Reason 6: Upgradeability

A final reason for considering an LLC even for a very small business: An LLC can rather easily make elections to be treated for tax purposes as either a C corporation or an S corporation. The LLC does this by filing rather straightforward one- or two-page forms with the IRS. (Note that the LLC would still be an LLC for state law purposes, but would be considered a corporation for income tax accounting purposes.)

This means that some day in the future, if running your business or investment as a corporation will save taxes, you’ll easily be able to morph your LLC into a regular corporation or S corporation for tax accounting purposes.

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About the Author: Seattle CPA and QuickBooks for Dummies author Stephen L. Nelson publishes of the llc incorporation explained website.