Even the smallest of businesses often have the letters “LLC” after them. Family owned diners, hair salons, even freelance workers often incorporate themselves when they are operating with a lot of volume. If you are one of the many considering an LLC, there are some pros and cons to consider for the aspects of your business.

Business Entity 

Incorporating your business creates a new entity in the eyes of the government. Being a separate entity allows for your business to function individually from your personal life, taking liabilities with it. Business transactions that are performed by Your Entity, LLC, are not automatically recognized as an action taken by You.

The dark side of this coin is the extra administrative work. Your business entity must have its own records that are thoroughly kept so as to not mix with your personal records. This can include separate banking accounts, which may cost extra versus using your personal checking account. Also, if there is no clear distinction between your personal and business doings, or if it’s determined that fraudulent activities were being done, this protection may be lifted by the courts.

Asset Protection

Possibly one of the biggest reasons people turn to incorporation, your work being performed by a separate business entity from yourself protects your personal assets from business incidents. If things go south, it is possible for a company to go bankrupt while its owners lose nothing outside of what was put into the company as their personal assets are not considered a part of the business assets.

This does not transfer liability from personal loans taken out to fund your business. If you took out a mortgage on your home to pay for the business, the business filing for bankruptcy may get the business out of its other obligations, but you could still have the debts you personally incurred in the process of forming the business.

Taxation

Taxation is a hot topic for business owners, particularly for small businesses, entrepreneurs, and the self-employed. In the traditional employee world, you are taxed on your gross income – what you make before every tax and employer benefit is taken out of your check. An LLC, however, is taxed on the net income – the money remaining AFTER the operating expenses of the business are subtracted from the gross income. This is why every penny spent by a business is monitored so closely.

However, you will then be personally taxed on the income as an individual, which can have higher tax liability than a corporation. You will still be on the line for federal and state taxes that are traditionally withheld, which can mean taxes being paid in every year rather than ever receiving a refund.There is a lot to consider when deciding whether or not to incorporate your business entity into an LLC. A hobby that turns into gas money may not need to worry about taxation or asset protection. You can learn more about LLCs from our article on understanding LLCs. If you are ready to move forward with forming your LLC, you can begin with our online registration form or by contacting us for assistance.