Why Start an LLC? (Top Reasons to Create One in 2025)

Starting an LLC is a strategic choice for entrepreneurs seeking the right balance between operational flexibility and legal protection.

Drawing from my experience as a business consultant, I've seen how this structure combines the liability protection of a corporation with the ease of a sole proprietorship.

I will provide an in-depth guide on how to start an LLC, and highlight essential information on the steps you need in this process.

Quick Summary

• Forming an LLC provides entrepreneurs with a balance between operational flexibility and legal protection, combining the liability protection of a corporation with the simplicity of a sole proprietorship.
• The popularity of LLCs across various industries, including real estate, professional services, and retail, highlights their versatility and appeal to a wide range of business ventures.
• The number of LLCs in the U.S. increased dramatically from about 200,000 in 1993 to over 2.4 million in 2018, with LLCs accounting for approximately 70.6% of all partnership returns filed in 2020​​​​, according to data from the U.S. Internal Revenue Service (IRS).
• Forming an LLC, in my opinion, is advantageous for entrepreneurs seeking legal protection without the complexity of a full corporation.

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What Is An LLC?

A Limited Liability Company is a form of business organization permitted by state legislation.

The LLC was established to limit the owners' personal liability (similar to a corporation), as well as allow the company to be taxed like a partnership.

Ownership of an LLC is known as membership (comparable to shareholders in a corporation).

By creating an LLC for your firm, you may do the following:

• Secure your money, automobile, and home.
• Increase your level of peace of mind.
• To safeguard your privacy.
• Allow for a higher profit margin.
• Allow for greater development speed.
• Raise your reputation in the eyes of others.

LLC Advantages

There are many reasons to form an LLC. Here are some of the key advantages:

• Limited Liability Protection - As an owner of an LLC, you have limited personal liability for the debts and actions of the company, meaning your personal assets are protected. This is similar to the protection of the personal assets offered by a corporation.
• Tax Flexibility - An LLC can be taxed as a sole proprietorship, partnership, or corporation.
• Flexible Ownership - An LLC can have any number of members (owners).
• Easy to Form and Maintain - In most states, it's relatively easy to form and maintain an LLC.

If you're thinking about opening an LLC, be sure to consult with a qualified business attorney to discuss the pros and cons of this business structure.

An attorney can also help you draft your LLC operating agreement, which will govern the operations of your company.

Read More: What is an LLC

Is It Necessary to Form an LLC to Begin a Business?

It is not necessary to create an LLC in order to establish a company. An LLC is simply one of a handful of business structure options.

Other options include:

• Sole Proprietorship -This is when a single individual runs the company. Business debts are not protected by the owner.
• General Partnership -This is the most basic structure, in which two or more people operate a firm. The partners; personal assets are not covered by personal liability for business debts/liabilities or other partners' activities undertaken within the course of the business.
• Limited Partnership - A limited partnership has two distinct types of owners: general partners (who run the company, make judgments, and are responsible) and limited partners (who are essentially investors who do not have the ability to operate the company or make business decisions and do not have personal responsibility for corporate debts).
• Corporation - A corporation, like an LLC, is run by the investors (known as shareholders or stockholders), who contribute money, assets, or services to the company in exchange for a stake in its profits.

The board of directors is chosen by the shareholders and comprises primarily big business decisions. Officers are chosen by the board of directors, who are in charge of the day-to-day operations of the company.

The shareholders, directors, and officers are not personally liable for the company's debts or actions.

• S Corporation -This is a specific type of corporation that allows shareholders to enjoy limited personal liability and pass corporate losses through to their individual tax returns.

In some cases, you may be able to form an LLC or a Limited Liability Limited Partnership (LLLP), which offers some limited liability protection to the general partners; or a Professional Association (PA), which is only available to people who work in specific vocations.

According to data from the U.S. Small Business Administration (SBA), approximately 33% of new businesses opt for LLC formation annually.

"Each year presents fresh opportunities for business growth, making it an ideal moment for small business owners to contemplate establishing a Limited Liability Company (LLC), the favored business structure among entrepreneurs due to its myriad benefits, including safeguarding personal assets and potential tax advantages."

- Delina Yasmeh, J.D./Tax LL.M, Distinguished Expert in Mergers & Acquisitions

Do You Need An LLC?

Small company owners should consider the following questions while evaluating whether an LLC is right for them:

• Risk level
• Profit potential
• Consumer confidence and trust

Risk and Limited Liability

Product liability, personal injury, and/or trademark infringement are all possible hazards for small businesses.

Any company that exposes itself to danger requires legal separation from its owner. Limited responsibility protection is the term used to describe this division.

In the case of a business being sued or failing to pay a debt, it protects a firm owner's personal assets (i.e., automobile, home, and funds).

Profit and LLC Taxes

The flexible tax options available to an LLC may be beneficial for a small firm that maintains a consistent profit.

Drawing from my experience, the tax flexibility of an LLC was a game-changer for my client's business profitability.

They benefited greatly from choosing between the pass-through taxation of an S corporation and the S corp tax type, adapting as their profits evolved.

LLC vs S Corporation

Business owners who want to reinvest profits back into their companies and S corporations (S corporations) are most suited for default Limited Liability Companies.

LLC vs Corporation

An LLC or corporation is a limited liability company that offers the same protections as a corporation.

As someone who's navigated both structures, I can affirm that a corporation's appeal lies in its suitability for attracting outside investors, largely due to its distinct tax implications.

This is evident when small businesses required external funding, making the corporate structure more advantageous.

Credibility and Consumer Trust

Consumer trust and recurring purchases are essential for small businesses. Credibility is crucial to the success of any business. By creating an LLC, businesses gain a degree of consumer trust and credibility.

Similar Articles:

• LLC vs C Corp
• LLC vs S Corp

Forming an LLC

There are seven basic procedures for creating an LLC, although the specifics vary from state to state:

Step 1: Choose the Type of Your LLC

Choosing the type of your LLC is crucial, as it determines your management structure and tax treatment.

Options include a single-member LLC, ideal for solo entrepreneurs, and multi-member LLCs, suitable for partnerships.

Some states offer specialized forms like professional LLCs for licensed professions. Consider your business needs and consult with a legal advisor for the best fit.

Step 2: Choose A Name For Your LLC

Your LLC's name must be distinguishable from the names of other business entities already on file with the state. Most states require that your LLC's name include either "LLC," "L.L.C.," or "Limited Liability Company."

Step 3: Choose a Registered Agent

Every LLC must have a registered agent. A registered agent is an individual or business entity that agrees to receive legal papers on behalf of your LLC.

Learn how to choose a registered agent for an LLC.

Step 4: File the Articles of Organization

The next step is to file the articles of organization with the state. The articles of organization, also known as the certificate of formation or charter, are a document that contains information about your LLC, such as its name, registered agent, and purpose.

Step 5: Create an Operating Agreement

An LLC operating agreement is a document that outlines the rules and regulations of your LLC. It is not required by law, but it is highly recommended.

An operating agreement can help prevent disputes among LLC owners and members and can make it easier to run your LLC.

Step 6: Get an Employer Identification Number (EIN)

The final step is to obtain an employer identification number (EIN) from the IRS [1]. An EIN is a nine-digit number that is used to identify your LLC for tax purposes.

You will need an EIN if you have employees or if you plan to open a bank account in the name of your LLC.

You can also save time and effort by hiring ZenBusiness to take over and launch the business for you.

Steps to Take After Forming an LLC

There are a few things to keep in mind after forming an LLC.

Open a Business Bank Account

It's a good idea to open a business bank account, even if you're the only one who will be using it. This will help you keep your personal and business finances separate.

While you're not legally required to have a business bank account, it can save you a lot of headaches down the road.

When applying for a business loan or line of credit, lenders will often require that you have a business bank account.

A business bank account can also help you build business credit fast. Business credit is separate from personal credit and can be used to get loans, lines of credit, and credit cards in the name of your business.

File Your Annual Report

To maintain good standing and avoid unjustified fines and penalties, it is critical to keep track of your state's filing deadlines. In most cases, an annual report must be filed. Some states also impose an annual charge.

Choosing Your Tax Structure

Both single-member LLCs and multi-member LLCs are subjected to pass-through taxation. The company's revenue goes through to the owner's individual tax return via pass-through taxation.

An LLC's profits are only taxed at the individual level, as opposed to a corporation's business income, which is taxed once at the company level and again at the personal level.

"Double taxation" is a term used to describe this process.

Sole proprietorships are also subject to pass-through taxation, like LLCs. There are two key distinctions between operating a business as a sole proprietorship vs an LLC:

• Sole proprietors are not covered by personal liability protection.
• S corporations can't be formed as sole proprietors.

A business may convert to an S corporation at any time, which is the best choice for small businesses that are still in their infancy. As an LLC grows, it may choose to be taxed as an S corporation.

The main S corporation tax advantage is that company owners no longer have to pay self-employment tax. This might result in tax savings under the right conditions.

The IRS requires that all LLCs submit an income statement to it each year through:

• Form 1065 Partnership Return (most multi-member LLCs use this form)
• Form 1040 Schedule C (most single-member LLCs use this form)

FAQs

References:

1. https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online