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5 Reasons to Incorporate a Small Business as a Limited Liability Company

Entrepreneurs face many obstacles when launching a new business venture. There is a 25% failure rate for new businesses in the first year, which increases to 50% by year four. Legal issues do not have to be a major obstacle. Entrepreneurs may minimize legal issues by incorporating a small business as a limited liability company (LLC). There are five reasons to incorporate a small business as a limited liability company (LLC) compared to a sole proprietorship or general partnership.

  1. Protect the Business Name: Many states extend protection to the names of businesses that are incorporated as a limited liability company. A business name is considered intellectual property. A company’s reputation is upheld in the name. Those who infringe may damage the reputation of a business.
  2. Shelter for Personal Assets: In this type of business structure, owners are referred to as members. Members avoid litigation if a business is sued. LLC members have limited liability for the financial obligations of a business. A creditor may not attach a lien on a member’s personal house or bank account for a debt owed by the business. Personal assets are vulnerable in a sole proprietorship or general partnership.
  3. Taxes Reported on Personal Income Tax Form: An LLC will avoid double taxation as income is reported only once. Business income or loss is reported on the personal income tax form of the members. Taxes are paid at the individual level rather than at the business level with a limited liability partnership. Members may deduct the full cost of personal health insurance premiums.
  4. Added Credibility: LLC behind a business name adds credibility. Banks and investors favor a limited liability company because of the business structure. Clients and customers respect the added credibility of an LLC.
  5. Transfer of Ownership: An LLC may easily be sold without the need to reorganize. In the case of an owner’s death, the ownership may be transferred to a benefactor.

*Photo courtesy of Limited Liability Company by Marie Rowland at Flickr’s Creative Commons.

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