Should You Form an LLC? Weighing the Pros and Cons

Thinking about business structures isn’t exactly sexy, but it’s important stuff to consider if you want to thrive in your self-employed endeavors. When deliberating whether to form an LLC or business entity, asking the right questions goes a long way. Coupled with proper legal advice, this method will set you up for success.

Here are some factors to think about when deciding whether to remain a sole proprietor, or to establish yourself as a business entity.

Possible tax benefits

Forming a business entity may come with tax benefits, depending on your income and filing status. The Balance offers an overview of what these benefits might entail.

Generally speaking, sole proprietors don’t need to file too much paperwork, and you might not need a tax professional to prepare your taxes. However, you probably won’t receive tax benefits or legal protection for your assets. Becoming an LLC or business entity might protect your assets and offer tax benefits.

On the other hand, forming a business entity could mean more paperwork and the need to file separate business and personal tax returns. Consider whether the extra work or the cost of hiring someone to help out is worth the money that you’ll save in tax breaks. To get a better idea of the time and effort that goes into forming an LLC, you can view state-specific information on Nolo.

Each business owner operates under unique circumstances, so talk to an experienced tax professional about the benefits and liabilities of becoming an LLC and the tax percentage benefits versus any lost time or money that the extra paperwork may lead to. Once you have a thorough understanding of the pros and cons, weigh them to make an informed decision.

Better business relationships

It’s not the case in all situations, but forming a business entity could make you look like a serious business owner. You can create contracts as a sole proprietor, but properly written contracts under your business will prevent sensitive information leaks or tax liabilities.

Imagine that you need to subcontract work to an artist to design the cover for a new book. The book is ghostwritten, and you don’t want your subcontractor to reveal who the author is. You might draw up an official contract under your LLC that includes a non-disclosure clause. This way, the artist is legally bound to keep all company information confidential.

Protection for your personal assets

Forming an LLC can limit your liability for any possible lawsuits or other legal situations. Since your business is separated from you personally, only your business will be responsible for legal obligations. To put it another way, you won’t have worry about putting your home or personal belongings at risk if you are unable to pay off business debts.

No matter what, your services should be treated as a business. Whether or not you form an LLC is up to you and what suits your business needs and individual financial situation. Speak to a legal professional to get a thorough understanding of the benefits and drawbacks of becoming an LLC to decide whether it’s the right move for your business.

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Sarah Li Cain

A B2B and personal finance writer who has appeared in publications such as Credit Karma, Magnify Money and Lending Tree.

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