This article discusses what an LLC is, and why it’s one of the most commonly adopted business structures in the USA. The reason many small business owners choose an LLC is due to many factors, like the industry they are in, their business goals, other investors, and more. Specifically, an LLC provides many protections and organizational advantages that other business structures don’t. The first step in knowing how to start an LLC structure is truly understanding what it is, how to form it, and how it compares to other business structures.
What’s an LLC
LLC is one of several types of business structures you can choose from when forming your business. You can create an LLC with just one owner, or with several business partners. The “limited liability,” component of an LLC means that the LLC’s owners, called members, aren’t personally responsible for the company debts and lawsuits. Moreover, if an LLC faces a lawsuit, or filed bankruptcy, the owners aren’t at risk of their own personal money being taken to pay for the company debts. In terms of taxes, the IRS looks at an LLC similar to how sole props, partnerships and S corps are taxed. The LLC itself doesn’t pay taxes, but the LLC members list business profits and losses on their own personal tax return. You can also choose to have your LLC taxed like a corporation, if you want the company to pay income taxes itself.
When is the best time to form an LLC
Forming an LLC is best when your business could reasonably face a lawsuit or have business debts. When you form an LLC, your personal assets are protected from your business operation losses and expenses. There are many instances where a business cannot be an LLC. If you’re looking to do banking, or insurance, you can’t use an LLC. In some cases, certain professional businesses like architects, accountants, etc cannot form an LLC.
How to start your LLC
Forming an LLC takes a few steps. They are significant and important. Here’s a brief guide on how to form an LLC.
Choose a business name for the LLC
In the majority of states, when you form an LLC, you have to include the terms LLC in the name of the business. The name of your LLC can’t infringe on the name of an existing corporation or LLC which is already registered.
Assign a registered agent for the LLC
When you start any business in the USA, you need to designate a registered agent/statutory agent for the business. The registered agent receives legal mail for your LLC, and forwards them to you. Your agent must be a resident of the state your LLC operates in, and must be at least 18 years old.
Get the necessary business permits and licenses
Many state/local governments require certain businesses to get specific licenses or permits. Businesses that sell tangible goods, or taxable services, must register for a seller’s permit and collect + report sales tax.
File articles of organization for your LLC
The most important step in making the LLC official is to file the articles of organization with the state Secretary of State office, and pay the fees. In general, the Articles cover the fundamental information of your LLC, like the business name, location, contact information of the LLC members, and the registered agent.
Draw up the operating agreement
This isn’t a legal requirement, but it’s something you should do. An LLC operating agreement enables you to structure the finances, and working relationships, among the members of the LLC. Some of the arrangements can include things like how profits are divided, how day to day operations are managed, how business decisions are made, and how the arrival of new partners / departure of older partners is handed.
LLC vs other corporate structures
When you start a business, it’s important you review and weigh the options regarding the structure of your business. Forming an LLC is just one of the many business structures you can select.
LLC v. Corporation
LLC is different than business which is incorporated. In a corporation, the company offers shares of stocks to the owners who became shareholders. Owners can transfer the shares with one another. In contrast, the owners of an LLC each own a % of the company. Because of this, membership and membership interest can be harder to change than the ownership of shares in a corporation. With a C corporation you are taxed twice – once when the corporation pays business income tax, and a second time when you get a dividend paid out to you by the corporation.
LLC v. Partnerships
There’s a lot of similarities between a partnership and an LLC. They are taxed similarly, with income tax passing through the company to you. You have to pay the tax on your personal tax return. The key difference is that a partnership needs at least 2 owners. A sole owner cannot be a partnership, but can be an LLC.
Pros of an LLC
Here are some benefits of an LLC that you may like.
-Reduce legal liability
-Less complex than a corporation
-Avoid double taxation
-Make the business official
Cons of an LLC
Here are some drawbacks. One of the biggest issues is equity compensation is more difficult. If you’re going to take in capital, investors often prefer C corporations. Moreover, it’s more difficult to operate than a sole prop or partnership.
There’s no right answer when it comes to the best business structure for the company. When you form a business, an LLC is the most common route taken by small business owners. The benefits of an LLC are huge, and the flexibility is immense.