If you’re a travel agency owner, you have a lot on your plate. Handling customers, making bookings, and just managing your business, in general, takes up a lot of time. However, if you’re currently running your travel agency as a sole proprietorship or partnership, you may want to consider taking the time to form a limited liability company (LLC). An LLC offers many benefits that make it a popular choice for travel agency owners.
In this article, you’ll learn about all the benefits of an LLC so that you can decide if it’s the right choice for your travel business.
Ease of Formation
An LLC is simple to form with your state, much more so than a corporation. It requires filing a document with your state, usually called the articles of organization, which can generally be done online.
Fees for filing vary by state and range from $40 to $500.
Forming an LLC often requires some other steps too, which is why many travel agency owners choose to use an LLC formation service. A service can help you with steps like creating an operating agreement. An operating agreement is particularly important if your travel agency has more than one owner, who in an LLC are called members.
An operating agreement defines ownership percentages and how profits and losses are distributed, as well as several other important provisions.
Personal Liability Protection
Probably the single most important benefit of an LLC is the personal liability protection that it offers. An LLC is a separate entity from its owners and has its own assets and obligations. This means that if you have an LLC and your travel agency cannot pay its debts or is sued, you are not personally liable for those obligations. This keeps your personal assets safe.
If you’re operating as a sole proprietorship or a partnership, the business and its owners are considered one and the same, making you personally liable for the obligations of the business.
You don’t want to think that your travel agency will ever be sued, perhaps for an issue with a vacation booking, but unfortunately, it’s a possibility. If that happens and you do not have personal liability protection, your personal assets, including your home, are at risk. An LLC eliminates that risk, except in certain situations.
The personal liability protection of an LLC may be threatened if you or another member commit fraud and cause injury to someone. Additionally, if you obtain a business loan and personally guarantee the loan, personal liability protection does not apply to that debt.
If you form an LLC for your travel agency and you are the sole member, by default your LLC will be taxed as a sole proprietorship. This means that the LLC itself is not taxed and profits and losses instead pass through to you to be reported on your personal tax return at your personal tax rate.
If your LLC has more than one member, your LLC is taxed as a partnership by default. This means that profits and losses are passed through to all members based on their ownership percentages. You’ll have to file a partnership tax return, but it’s for informational purposes only. The partnership is not taxed.
But in both cases, profits are subject to self-employment taxes in addition to income taxes, which are currently 15.3%.
Here’s the kicker. LLC members can elect to have the LLC taxed as an S-Corporation. An S-Corporation still has pass through taxation, but self-employment taxes only apply to the salaries that members are paid, not the profits. That can be a significant tax savings. However, because the salary requirement brings additional administrative costs, your profits have to reach a point where the self-employment tax savings exceed the administrative costs.
Determining whether S-Corp status is beneficial requires some complex calculations, so you should consult a tax advisor to see if it’s the right choice for you.
You can also elect to have your LLC taxed as a C-Corporation, but this is only beneficial in certain situations, and is less common than an S-Corp election.
Management Flexibility and Control
Much like a sole proprietorship or partnership, an LLC comes with management flexibility. You can decide how the LLC will be managed and who will manage it. In a corporation, on the other hand, there are management requirements that must be met. For example, a corporation must have a board of directors.
With an LLC, your travel agency can be member-managed or manager-managed.
In a member-managed LLC, all members have an active role in the day-to-day management of the business. The roles and responsibilities of each member are up to you, but they should be defined in your operating agreement.
In a manager-managed LLC, not all members are actively involved in the management of the travel agency. Perhaps one member wants to be a passive owner of the business. Other members would then be appointed as managers, which will be specified in the operating agreement.
Additionally, with a manager-managed LLC, outside managers can be hired.
The bottom line is that the choices you make about managing your travel agency are yours. Just be sure to clearly define your management structure in your operating agreement.
Finally, having an LLC rather than a sole proprietorship or partnership gives you a level of credibility, particularly with lenders and vendors. It makes them perceive your travel agency as more of a serious operation. You’ve taken the time and expense to form a business entity, so you’re in the game for the long haul.
It doesn’t seem like much, but perception makes a big difference.
As you can see, an LLC has many benefits, most importantly, the personal liability protection that it offers. It’s probably the number one reason that travel agency owners choose to form an LLC. In any business, you should do everything you can to protect your personal assets, and an LLC offers a level of protection that can give you peace of mind. It’s also easy to form an LLC, so consider taking some time to get started. If you need help, look to an LLC formation service or an attorney to walk you through the process.