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When is a business ready to become an LLC?

On Behalf of | Jan 10, 2024 | Business Law

You might have a talent or trade that you have turned into a side hustle. At first, the goal might not have been to create a full-time business, but as the gig grows and becomes more successful, you could start to wonder if it is time to take things to the next level.

A beneficial step in becoming a legitimate business is the formation of a business entity. Many small business owners start with an LLC. Why do so many people choose this route, and what are the benefits?

What is an LLC?

“LLC” stands for Limited Liability Company. It is a legal entity that separates your personal assets from your business interests. In other words, your business’s activities and funds are distinct from your privately owned accounts and property, almost as if your business is a different person.

You do not have a minimum earnings threshold or level of business activity to become an LLC. As long as you file the appropriate documents and pay the taxes and fees, you can access the benefits of an LLC, no matter the size of your operation.

What are the benefits of an LLC?

With an LLC, if something goes wrong with the business and there are debts or lawsuits, the case will not affect your personal assets. This protection is one of the most significant benefits of forming an LLC.

Another benefit is tax flexibility. Unlike a corporation, the government does not tax an LLC separately from the owner. Instead, the business income and expenses pass through to your personal tax return.

This means that there is no “double taxation” as there would be with a corporation. Additionally, you can choose to have the government tax your LLC as a sole proprietorship or partnership, which can lead to more favorable tax treatment. Interestingly, over 70% of all partnerships in the United States are LLCs and have surpassed all other partnership entities for over two decades, proving how beneficial this business type is.

An additional advantage of forming an LLC is that it provides credibility. When you have an LLC, it shows that you take your business seriously. You look more professional in the eyes of your customers, suppliers and partners. Also, an LLC can help you secure financing more easily because it shows that you have a legitimate business.

Forming an LLC can be a smart move for a business owner who is ready to take things to the next level. If you are considering forming an LLC, make sure you follow North Carolina’s regulations for formation and operation to protect your business and your personal accounts.