Currently, it is one of the best times to start an online business, as 95% of purchases are expected to be online by 2040. Whether it’s your primary income or a side hustle, an online business has a lot of potential to grow and bring you profit. However, running one also comes with some risks, which can be prevented by creating an LLC.
An LLC (Limited Liability Company) is a legal structure that protects the assets of business owners in case a business fails on its loans. Here are 4 benefits of forming an LLC to help you decide to create it for your online business.
1. 20% Pass-Through Deduction
Setting up an LLC for your online business can make you eligible for the 20% pass-through deduction effective till 2025. This would allow you to deduct up to 20% of your business’s net income when calculating your income tax. LLCs typically pass through their business income or losses to the individual tax returns of the LLC owners.
If your online business is profitable, you can take advantage of this deduction, which shareholders of C corporations cannot benefit from. So, if you want to save money in your business, taking a step-by-step LLC lesson in Pennsylvania will teach you how to create an LLC for your company if it’s based in that state.
2. Limited Liability
Your personal and business finances are closely intertwined when you operate a business as a sole proprietorship or in a general partnership. This means that any debts or legal liabilities your business incurs can put your personal assets, like your home or private bank account, at risk of being seized by lenders to cover these obligations.
If you establish your business as an LLC, you are not personally responsible for covering business debts unless you’ve guaranteed them. Instead, creditors can only use the assets and funds of the LLC to settle these debts, and your assets, such as your home, typically remain safe from their reach.
It’s important to highlight that you might still be personally responsible for significant debts, especially if the LLC has a bad credit history. Additionally, landlords might ask you to personally guarantee a lease for your LLC.
Creating an LLC also protects you from personal liability in cases where injuries occur due to your business operations. Additionally, if your online business has multiple owners, forming an LLC also shields you from liability for the actions of your co-owners.
3. Easy Management
LLCs offer considerable flexibility in management as they can be operated by their members or managed by a management group, including members and non-members.
Small LLCs typically have member-managed structures and fewer corporate record-keeping obligations than corporations. Unlike corporations, where you must conduct and document shareholder meetings, even if you’re the sole owner, an LLC doesn’t mandate formalities, which is more suitable for an online business.
4. Tax Flexibility
LLCs offer tax flexibility because they typically don’t have to pay taxes themselves. Instead, they pass on any profits or losses it generates to the owners’ tax returns, which is why people refer to LLCs as “pass-through entities.”
For single-member LLCs, the tax treatment is often similar to that of a sole proprietorship – you report your business income and deductible expenses on IRS Schedule C when you file your tax return. Then, you pay income tax based on your individual tax rates on your business’s profits, which is less costly than forming a corporation.
LLC owners also have the option to choose a different tax classification, either as a regular C corporation or an S corporation. This involves filing IRS Form 8832, the Entity Classification Election form, and selecting the desired corporate tax treatment option. Opting for C or S corporation taxation can sometimes lead to tax savings for LLC owners.
It is an ideal time to run an online business, but it comes with risks which you can minimize by
forming an LLC. An LLC is a legal structure that protects your business and your personal
assets in cases of debt or liability. LLCs are also easier to manage than corporations since you
don’t need to conduct shareholder meetings and require less recording keeping. They can also
help you save money through their tax flexibility, allowing you to choose your more suitable tax
classification and its 20% pass-through deduction in the US.