When you're setting up a business, the paperwork involved just to get started trading can be overwhelming. From name registration and choosing a website domain name, to insurance and supplier agreements, the list of legal and general business requirements to tick off can be a mile long.

One of the most important things you need to consider though is the type of entity your business will trade as. There are a number of options when it comes to structuring your new business, including sole proprietorship, a partnership, a not-for-profit society, a co-operative, or a corporation. Each one has its pros and cons to consider.

While many “solopreneurs” stick with a simple sole trader set up, it can often be beneficial to go through some extra paperwork to incorporate a limited liability company (LLC). If you're keen to find out the best path to go down for your new business, read on for some top reasons other entrepreneurs set up LLCs.

Limited Liability

As the name suggests, one of the most beneficial reasons to set up an LLC is to limit your personal liability. If you operate as a sole trader, you won't have any personal liability protection and as a result will need to assume all of the liability of the company.

This means that if, for example, someone gets sick from one of the meals you serve, or slips and injuries themselves in your store, and then decides to sue the business, your personal assets (such as your house, car and any savings) can be seized to pay debts.

On the other hand, if you operate under an incorporated company, the business is considered to be a separate legal entity from its shareholders. (As the owner, or part-owner, you possess either all, or some of, the shares in the business). When you set up your entity as a corporation, your individual shareholder's liability is limited to just the amount you have invested in the company.

As a shareholder, you cannot be held responsible for the debts of the business unless you have signed some paperwork as a personal guarantor. This means that none of your personal assets can be touched if the business can't pay its debts, is sued, or has to fold.

Potential Tax Benefits

Another advantage of a company that you might like to consider is the potential tax benefits. Unlike a sole trader set up, when you run your business as a corporation you can decide when, and how much, income you will receive each year. This income control can be quite a beneficial tax advantage. Please note though that you will need to obtain specific advice for your situation from a tax professional.

In addition, when running the business as a company you have the ability to split its income among shareholders. Corporations pay dividends to shareholders from earnings, but there are no requirements for shareholders to be actively involved in the running of the business or for workload to be shared equally. This means that you can set up your spouse/partner, as well as potentially your children, as shareholders in the corporation. As a result, income can be redistributed from family members in higher tax brackets to those with smaller incomes paying a lower tax rate.

Credibility

Trading as a corporation rather than as a sole proprietor can also give the business added credibility. Operating as a company shows potential and current clients that you're not just running a freelance or consulting business as a part-time gig or as a hobby, but that you are very serious about the long-term success of the entity.  Incorporation can tend to add another level of professionalism and create more trust, all of which helps to convert customers.

Potential Growth

When it comes to attracting investors into a business to enable growth, an LLC setup is also helpful. Venture capitalist funds generally tend to only invest in corporations because of the limited liability factor mentioned above, as well as the fact that shares can easily be transferred. This is not the case for a sole trader business.

Flexibility

Companies also provide more flexibility to owners. Unlike sole proprietorships, and even partnerships, corporations do not have to rely on particular individuals to keep running. Corporations have an unlimited lifespan, and can continue indefinitely, until closed, merged with another business, or declared bankrupt.

If shareholders pass away, or if they simply wish to transfer ownership of their interests to a family member or other person, a company set up allows this to happen. Shareholdings can be sold or otherwise divested without needing to go through such a huge amount of paperwork and legal requirements as those needed for a sole trader entity.

Just remember, no matter which type of business set up you choose, it's important to get legal and financial advice from professionals who work in the area day in and day out.