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Incorporating your business offers numerous benefits to business owners, including protecting your assets from liabilities and various tax benefits. However, choosing the most suitable business structure for your company will depend on the type of industry you’re in.
For most businesses, incorporating as an LLC is the most common option. LLCs provide business owners with a certain level of protection against potential liabilities while still offering a higher degree of flexibility and freedom.
Still, is it the right choice if you’re running a software development business? If so, what are the benefits you can gain when incorporating this type of business as an LLC?
Find out more about it in this article.
An Overview of LLCs
Before you can identify whether or not it’s the right business structure for you, you will need to understand what an LLC is.
Limited Liability Companies or LLCs are business structures that allow business owners to establish their company as a separate legal entity. Doing so enables them to protect their personal assets from any liability or legal action against the company, like debts, lawsuits, and more.
What’s notable about this business structure is that an LLC works like a hybrid between a sole proprietorship or general partnership and a corporation. This means you get to enjoy the best of both worlds when incorporating your business as an LLC.
With an LLC structure, you enjoy the benefits of sole proprietorships like pass-through taxation. At the same time, you also receive the liability protection that corporations enjoy.
The incorporation process for LLCs is also simpler and easier than corporations, so you don’t have to undergo complex procedures to establish your business as one. Moreover, the costs are lower for LLCs, usually only comprising the state filing fee, which varies from state to state.
However, some types of businesses aren’t compatible with this type of structure, so it’s best to consider your industry before starting the incorporation process.
Software Development Company as an LLC: the Right Choice?
As mentioned, not everyone benefits from incorporating as an LLC, so you will need to consider several factors before deciding on your business structure.
For example, if your industry isn’t usually subjected to risks of lawsuits or other liabilities, you might not be able to maximize the benefits of an LLC structure.
Fortunately, this type of business structure is perfect for software development companies, and business owners in this line of work can benefit a lot from incorporating their business as an LLC.
Advantages of an LLC for Software Development Businesses
Again, software development companies can benefit a great deal from incorporating their businesses as an LLC instead of staying as a sole proprietorship or becoming a corporation.
Still, what exactly are these benefits or advantages?
Starting and running a software development business can be costly, so eliminating unnecessary expenses is crucial. Paying taxes can chip at your company’s profits, especially if done twice.
That’s why some of the biggest advantages LLCs offer this type of business are tax benefits, specifically its pass-through taxation scheme. This type of taxation means that the government doesn’t tax your business as a separate entity.
Instead, you pay its taxes using your personal tax returns, so you don’t pay double the taxes – one for your personal income, another for the business’s net income, unlike corporations.
Of course, you can also file for an S-Corporation tax status with the IRS. This means that business owners are treated as company employees instead of owners. This reduces the self-employment taxes you need to pay and allows you to add more to health insurance premiums or 401k.
Sole proprietorships and partnerships enjoy this type of taxation scheme, but they don’t have the protection against liabilities that corporations have.
Due to the nature of their services, software development companies are at a higher risk of being subjected to liabilities, like intellectual property claims, product liabilities, and data breaches.
That’s why you can benefit from incorporating as an LLC because it means that your business is treated as a separate legal entity, and you can receive limited protection against these types of liabilities, unlike with sole proprietorships.
That means you don’t have to worry about your personal assets being compromised if your company undergoes legal troubles. You also don’t have to worry about them being seized in case your business goes bankrupt or defaults on a loan.
Another benefit of LLCs for software development companies is that they can help boost your credibility among consumers, which is crucial if you want to succeed in the industry. This is because incorporating as an LLC establishes your business as a legitimate one.
In turn, this increases consumers’ confidence in your business since they know they’re dealing with an established business.
Starting a software development business can be tough, especially when it comes to choosing the right business structure for your needs. In this case, incorporating as an LLC can be incredibly beneficial for this type of company because it offers increased credibility, liability protection, and lucrative tax benefits.