Three Reasons to Create a Limited Liability Company

If you are starting a new business or have been operating a business as a sole proprietor, you may be considering the possibility of establishing your business as a limited liability company (LLC). There are advantages to making your business an LLC.

1. Limited Personal Liability. The primary reason most of my clients make the jump from a sole proprietor to a business entity is to limit their personal liability exposure for business operations. LLCs provide a level of liability protection, preventing creditors from seeking to satisfy business debts through the owner’s personal assets (such as the personal house, car, and bank accounts). Without a limited liability legal entity, operating as a sole sole proprietorship exposes an owern’s personal assets to risk of loss.

2. Tax Advantages. In Texas, an LLC can elect to be taxed as a sole proprietor, partnership, or corporation, depending on the current circumstances of the business. The owner can choose corporate taxation, where the LLC is taxed at the business level and the members pay taxes on their individual distributions. Or, the owner can choose “pass through” taxation for the LLC, where no tax is paid at the business level (subject to the state franchise tax, if applicable), but the profits and losses are passed through to the individual owner(s) and reported on their income tax returns. The net profit of the business is not deemed income to the owner and is therefore not subject to self-employment tax. Additionally, operating expenses and depreciation of the company assets can be deducted from the gross revenues of the LLC.

3. Credibility. Forming an LLC establishes business credibility and trustworthiness with potential customers. Potential investors, employees and vendors tend to deem business entities as less risk than sole proprietors.

Of course, these are not the only benefits, but these are the the three main advantages that interest my clients who are seeking to establish a LLC.

Interestingly, the biggest challenge in creating an LLC in Texas is finding a name that hasn’t already been taken . . . but that is a topic for another entry.

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