There quite a few reasons to set up a limited liability company (LLC) for your small business, but the biggest reason why we advise most of our small business clients to do so is simply the words “limited liability.”
1. Limited Liability Means You Are Personally Protected
“Limited liability” is a legal concept that means the owners and managers of an LLC are not personally responsible for the liabilities (debts, obligations, lawsuits, etc.) of the LLC. If your LLC goes under because of a big lawsuit, that means that the LLC might cease to be, but you won’t have to file bankruptcy. The LLC limits the liability of the owners and managers. This limited liability concept is borrowed from traditional corporations, but for LLCs is done in a much simpler way that most people can use for their own small businesses. Which is why we recommend it for almost all of our small business clients.
2. They are Really Easy to Set Up
LLCs are dead simple to set up in Michigan. All you need is a name, internet access, and $50. Fill out a really quick form online with the Michigan Department of Licensing and Regulatory Affairs, and you have yourself an LLC.
3. They Make Taxes Pretty Easy
Taxation with LLCs is much easier than it is with corporations. Most LLCs are taxed by the IRS as pass-through entities, which means that the IRS pretends that the LLC doesn’t even exist. Instead, you just need to disclose your profits and losses in your 1040 and (most likely) pay quarterly estimated taxes.
4. LLCs Are Very Flexible to Run
Management of LLCs is also really easy to set up. Most LLCs are single-member LLCs, meaning they have only one owner. In that case, you run the shop and don’t need much else. If you have multiple owners, you can set it up so that all of the owners run the LLC, some of the owners run it, or instead hire a separate non-owning manager who runs things. If you are going to have multiple owners, we do recommend having a document called an operating agreement that sets down on paper who is responsible for what. That way, responsibilities are clear and defined.
5. LLCs Have Flexible Ownership
With an LLC, it is a snap to add owners. You can start with multiple owners right off the bat. If you decide you want to add owners later on, you just need a vote of the existing members of the LLC or an assignment of membership interest. Further still, you can easily divvy up or reassign how profits are to be shared. The amount of profits each member is entitled to can be different from their ownership amount. It’s all up to how you want to structure it.