7 Times When LLC Is the Right Choice

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Limited liability companies (LLCs) are extremely flexible, so they work well for a variety of businesses – big and small. They can be structured in several ways to meet your needs. An LLC is also a separate legal entity, which means it offers asset protection benefits that a sole proprietorship or partnership just does not have.

There are a variety of situations where an LLC is the right choice for your business or your personal asset protection needs. Consider the following scenarios.

When You Invest in Real Estate …

Real estate is often held in an LLC for investment purposes. Real estate can be a risky asset, and maintaining the investment in a separate legal entity may be a good idea in terms of asset protection. When you invest in an LLC, your losses are limited to your financial investment. Generally, creditorscannot reach beyond the property of the LLC to pay off debts. At most, then, you risk losing the real estate itself. When you invest in a large chunk of real estate, such as a high rise or apartment building, you may want to consider holding each separate property in a different LLC. This adds an extra layer of protection so that only one individual property is at risk in each legal entity.

When You Want a Manager-Managed Structure …

LLCs have significant flexibility when it comes to structure. An LLC can be managed by a single person or it can include a team of individuals that make decisions on behalf of the company. You can also set up a Board of Directors just like a corporation. You also have the option of turning over management to a third party, a manager. A manager-managed LLC allows you to simply own the LLC as an investment without having day-to-day obligations. It works well for companies that have quite a few passive investors. A manager-managed structure feels and acts more like a corporation, but it still has all of the benefits of an LLC. It works well when there are many members and using a member-managed structure would be too complex or burdensome to be successful.

When the Business is Small …

LLCs are a great option for small businesses because you can create the structure with just one person. There are also no requirements regarding assets either – you can have just one large asset or many smaller assets in the LLC, and the structure and legal necessities will still be the same. Keep in mind, however, that in some states, a single-member LLC will not offer the same asset protection benefits as a multi-member LLC. LLCs work well for smaller businesses because they have tax advantages as well. An LLC can choose how it should be taxed, and for smaller companies, that means they can have the benefits of limited liability with the added advantage of being taxed as a “pass-through” entity like a sole proprietorship or partnership. That means no double taxation associated with a corporation.

When You Want Successor Options …

It is difficult to pass on a sole proprietorship because all of the assets and liabilities are actually in your name personally as there is no separate legal entity. This is a challenge that many small business owners do not consider until they near retirement and want to pass their business on to their children or other beneficiaries. Using an LLC model allows you to easily pass on your business to others because you can transfer your interest easily. Because an LLC is a separate legal entity, it can have a perpetual existence, just like a corporation. That means that your business will live on long after you do, allowing for children or even other investors to maintain the business when you are unable to continue.

When You Want to Avoid Complicated Legal Requirements …

One of the drawbacks of a corporation is that it has complex regulatory requirements that must be met so that it continues to function as a separate legal entity and asset protection corporation. An LLC offers the same asset protection benefits without having to deal with complicated legal maintenance. In most states, the LLC structure is not required to hold an annual meeting, and it can choose whether or not to have a Board of Directors. There is also generally fewer recordkeeping requirements compared to a corporation, and regular filings are far less demanding.

When You Want “Special Allocation” of Profits …

LLCs are flexible enough that you can alter which members receive a full share of the benefits and which partners receive a smaller portion. There is no need to treat everyone equally if your business structure would work better without such treatment. This design is similar to having levels of shareholders in a corporation, such as preferred stockholders and common stockholders. You can arrange revenue payments however you would like. Consider an example. Imagine you have two or three active members of the LLC. They handle the day-to-day operation of the business while there are also five additional investors in LLC that would rather have a more hands-off approach. You may decide that it would be more appropriate if these investor-members have a smaller amount of the profits, and you can set that up within the operating agreement of the LLC. Changing the benefit structure may also be a good way to attract investors as well.

When You Want a Few Extra Perks …

LLCs offer several small benefits that can add up over time when used properly. For example, a member of an LLC’s income is not considered “earned income” for tax purposes, which means that you are not subject to additional self-employment tax at the end of the year. Members can also be compensated by either guarantee payments or distributions of profits. If you take distributions, you can essentially have the LLC write you a check from the profits whenever you need it. Guarantee payment may also qualify you for certain fringe benefits. Managing members can also deduct the full cost of their health insurance (up to the pro-rata share of net profit) in most circumstances. You can also add a corporation as a member, which can provide you with traditional fringe benefits and an extra layer of asset protection. Being creative can go a long way to taking advantage of the many benefits that an LLC has to offer. At Protect Wealth Academy, we teach tricks like these and so much more. Use our resources to determine whether setting up an LLC is an option for your business or your asset protection plan. To get started, sign up for a free membership now.