In order to maintain competitive profit margins, business owners must seek a wide range of potential cost savings. Of course, finding the most affordable office space is one of the best ways to control costs. But another, even more foundational step is to choose the right legal structure for your business.

Simply put, the legal structure you choose can impact nearly every aspect of business ownership, particularly business finance. It directly affects how you pay your taxes, what kind of financing you can receive, even how you structure your management team. Choosing the right structure is absolutely paramount for business success.

So which legal structure is the best one? While there’s not necessarily a single right answer, a majority of businesses benefit from registering as a Limited Liability Company, or LLC. There are some significant ways in which the LLC format can yield cost savings for your business.

LLCs Explained

To begin with, what is an LLC?

LLCs are a popular way to structure small and medium-sized businesses. The LLC format has been around since the 1970s, and in that time it has grown into one of the most popular business structures in the country. It’s widely used across virtually all industries and verticals.

Here’s some important background information for understanding what makes the LLC unique. Normally, when you start generating income on the basis of self-employment, the government considers you to be a Sole Proprietor. This basically means there is no distinction between you and your business; your personal and business assets are one and the same, and likewise with your business liabilities.

When you register your business as an LLC, it does establish a whole new legal entity. This means you can keep your business assets in one pot, and your personal assets in another. Similarly, you can maintain a separation between personal and business liabilities.

The LLC format offers a lot of the flexibility you’d get from a Sole Proprietorship, along with the kinds of legal protections you’d expect from a Corporation. That’s a big part of what makes the LLC structure so popular. But what are some of the specific ways in which registering as an LLC can help you control costs?

How Does an LLC Help You Save Costs

As you seek to control costs on behalf of your business, there are a number of benefits that the LLC format can offer.

Wealth Protection

First and foremost, when you maintain separation between your personal assets and liabilities and your business assets and liabilities, it means you can keep certain things “off the table” to litigation and creditors. For example, if you are ever sued, you can be assured that you won’t lose things like your family nest egg or your home.

This is a meaningful way to experience peace of mind, and to invest confidently in your business… knowing that you have some built-in safeguards against extravagant legal expenditures.

Tax Flexibility

Another significant benefit to the LLC structure is that you have the ability to choose how you report to the government. By default, LLCs are taxed as pass-through entities, meaning you get to declare profits and losses on your personal tax return and pay at your normal tax rate. This is usually a very cost-effective strategy, but if you determine that paying the corporate tax rate would be even better, you can always elect to do so.

This build-in flexibility can help you maintain an adaptive business even in a very fluid or volatile marketplace.

Enhanced Credibility

A final note about the LLC format: When you register your company as an LLC, you prove that it is a legally valid, legitimate, and serious business. In other words, you confer a significant amount of professionalism on your own enterprise, which can help you earn the trust of lenders and investors.

For newer businesses looking to raise funding, this can be an essential benefit, and something that a Sole Proprietorship cannot match.

Getting Started with an LLC

Clearly, there are some major cost advantages to registering your business as an LLC. Now the question is, how do you start one?

The guidelines vary by state, so forming an LLC in New York looks different than forming one in Florida or Wisconsin. With that said, here are some general guidelines.

How Much Does it Cost to Form an LLC?

On the topic of cost savings, registering an LLC is pretty affordable. When you register, you’ll need to pay the LLC formation fee, which can vary from state to state. The rate may be anywhere from $20 to $300. 

What Kind of Paperwork is Needed?

There are usually two documents needed to register your business as an LLC:

• The Operating Agreement serves as a blueprint for your business, outlining how you’ll divide up profits and responsibilities between your partners.
• You will also need to file Articles of Organization, which is the document that officially registers your business as an LLC. 

What About Taxes?

The only state that has an LLC-specific tax is California, where you’ll be on the hook for $800 annually. Again, LLCs are generally a great option for business owners adamant about controlling costs.

What Else is Required to Form an LLC?

Before you start operating your business as an LLC, you’ll need the following in place:

• A Registered Agent
• An Employer Identification Number (EIN)
• A business bank account

Cut Costs with LLC Formation

Every business benefits from containing costs. And one of the best options for keeping costs under control is registering your business as an LLC.