There are several ways to arrange your business. The Limited Liability Company, or LLC, is one of the most popular organizational structures. Learn why this structure is appealing and get some direction on whether an LLC might be the best choice for your company.
Although an LLC isn't appropriate for every company owner, there may be compelling reasons to create one.
The following information can assist you in determining whether or not an LLC is appropriate for your business.
What Is An LLC?
A Limited Liability Company, sometimes called an LLC, is a form of the business organization permitted by state legislation.
The LLC was established to limit the owners' personal liability (similar to a corporation), as well as allow the company to be taxed like a partnership.
Ownership of an LLC is known as membership (comparable to shareholders in a corporation).
By creating an LLC for your firm, you may do the following:
- Secure your money, automobile, and home.
- Increase your level of peace of mind.
- To safeguard your privacy.
- Allow for a higher profit margin
- Allow for greater development speed.
- Raise your reputation in the eyes of others.
There are many reasons to form an LLC. Here are some of the key advantages:
- Limited Liability Protection - As an owner of an LLC, you have limited personal liability for the debts and actions of the company, meaning your personal assets are protected. This is similar to the protection of the personal assets offered by a corporation.
- Tax Flexibility - An LLC can be taxed as a sole proprietorship, partnership, or corporation.
- Flexible Ownership - An LLC can have any number of members (owners).
- Easy to Form and Maintain - In most states, it's relatively easy to form and maintain an LLC.
If you're thinking about forming an LLC, be sure to consult with a qualified business attorney to discuss the pros and cons of this business structure. An attorney can also help you draft your LLC operating agreement, which will govern the operations of your company.
Read More: What is an LLC? (In-Depth Guide)
Is It Necessary to Form an LLC to Begin a Business?
It is not necessary to create an LLC in order to establish a company. An LLC is simply one of a handful of business structure options.
Other options include:
- Sole Proprietorship. This is when a single individual runs the company. Business debts are not protected by the owner.
- General Partnership. This is the most basic structure, in which two or more people operate a firm. The partners; personal assets are not covered by personal liability for business debts/liabilities or other partners' activities undertaken within the course of the business.
- Limited Partnership. A limited partnership has two distinct types of owners: general partners (who run the company, make judgments, and are responsible) and limited partners (who are essentially investors who do not have the ability to operate the company or make business decisions and do not have personal responsibility for corporate debts).
- Corporation. A corporation, like an LLC, is run by the investors (known as shareholders or stockholders), who contribute money, assets, or services to the company in exchange for a stake in its profits.
The board of directors is chosen by the shareholders and comprises primarily of big business decisions. Officers are chosen by the board of directors, who are in charge of the day-to-day operations of the company.
The shareholders, directors, and officers are not personally liable for the company's debts or actions.
- S Corporation. This is a specific type of corporation that allows shareholders to enjoy limited personal liability and pass corporate losses through to their individual tax returns.
In some cases, you may be able to form as a Limited Liability Company (LLC) or a Limited Liability Limited Partnership (LLLP), which offer some limited liability protection to the general partners; or a Professional Association (PA), which is only available to people who work in specific vocations.
Do You Need An LLC?
Small company owners should consider the following questions while evaluating whether an LLC is right for them:
- Risk level
- Profit potential
- Consumer confidence and trust
Risk and Limited Liability
Product liability, personal injury, and/or trademark infringement are all possible hazards for small businesses.
Any company that exposes itself to danger requires legal separation from its owner. Limited responsibility protection is the term used to describe this division.
In the case of a business being sued or failing to pay a debt, it protects a firm owner's personal assets (i.e., automobile, home, and funds).
Profit and LLC Taxes
The flexible tax options available to an LLC may be beneficial for a small firm that maintains a consistent profit. The pass-through (S corporation) tax classification or the S corporation (S corp) tax type can be chosen by LLC owners.
LLC vs S Corporation
Business owners who want to reinvest profits back into their companies and S corporations (S corporations) are most suited for default Limited Liability Companies.
LLC vs Corporation
An LLC or corporation is a limited liability company that offers the same protections as a corporation. However, which business structure is best for your small firm?
A corporation is only beneficial for business people who require outside investors. This is due to the fact that corporations are taxed in a different manner. If certain outside investors are required, a small business might profit from forming a company.
Credibility and Consumer Trust
Consumer trust and recurring purchases are essential for small businesses. Credibility is crucial to the success of any business. By creating an LLC, businesses gain a degree of consumer trust and credibility.
Forming an LLC
There are six basic procedures for creating an LLC, although the specifics vary from state to state.
The following are the six most important steps for establishing an LLC in any given state:
Step 1: Select a State
The first step is to select the state in which you wish to establish your LLC. You can form an LLC in any state, but you must register it in the state where your company will do business.
Step 2: Choose A Name For Your LLC
Your LLC's name must be distinguishable from the names of other business entities already on file with the state. Most states require that your LLC's name include either "LLC," "L.L.C.," or "Limited Liability Company."
Step 3: Choose a Registered Agent
Every LLC must have a registered agent. A registered agent is an individual or business entity that agrees to receive legal papers on behalf of your LLC.
Step 4: File the Articles of Organization
The next step is to file the articles of organization with the state. The articles of organization, also known as the certificate of formation or charter, are a document that contains information about your LLC, such as its name, registered agent, and purpose.
Step 5: Create an Operating Agreement
An LLC operating agreement is a document that outlines the rules and regulations of your LLC. It is not required by law, but it is highly recommended.
An operating agreement can help prevent disputes among LLC owners and members and can make it easier to run your LLC.
Step 6: Get an Employer Identification Number (EIN)
The final step is to obtain an employer identification number (EIN) from the IRS. An EIN is a nine-digit number that is used to identify your LLC for tax purposes.
You will need an EIN if you have employees or if you plan to open a bank account in the name of your LLC.
Things To Keep In Mind
There are a few things to keep in mind when forming an LLC.
Both single-member LLCs and multi-member LLCs are subjected to pass-through taxation. The company's revenue goes through to the owner's individual tax return via pass-through taxation.
An LLC's profits are only taxed at the individual level, as opposed to a corporation's business income, which is taxed once at the company level and again at the personal level.
"Double taxation" is a term used to describe this process.
Sole proprietorships are also subject to pass-through taxation, like LLCs. There are two key distinctions between operating a business as a sole proprietorship vs an LLC:
- Sole proprietors are not covered by personal liability protection.
- S corporations can't be formed as sole proprietors.
A business may convert to an S corporation at any time, which is the best choice for small businesses that are still in their infancy. As an LLC grows, it may choose to be taxed as an S corporation.
The main S corporation tax advantage is that company owners no longer have to pay self-employment tax. This might result in tax savings under the right conditions.
Open a Business Bank Account
It's a good idea to open a business bank account, even if you're the only one who will be using it. This will help you keep your personal and business finances separate.
While you're not legally required to have a business bank account, it can save you a lot of headaches down the road.
When applying for a business loan or line of credit, lenders will often require that you have a business bank account. This is because they want to see that you're serious about your business and that you're organized.
A business bank account can also help you build business credit. Business credit is separate from personal credit and can be used to get loans, lines of credit, and credit cards in the name of your business.
Annual report due dates must be met (Compliance)
To maintain good standing and avoid unjustified fines and penalties, it is critical to keep track of your state's filing deadlines. In most cases, an annual report must be filed. Some states also impose an annual charge.
Stay on Top of Tax Filing
The IRS requires that all LLCs submit an income statement to it each year through:
- Form 1065 Partnership Return (most multi-member LLCs use this form)
- Form 1040 Schedule C (most single-member LLCs use this form)
What Is the Downside to an LLC?
The main downside of an LLC is that it offers limited liability protection. This means that if the LLC gets sued, the owners will not be personally liable for any damages.
Another downside of an LLC is that it can be more expensive to set up and maintain than a sole proprietorship or partnership. This is because LLCs are required to file more paperwork with the state and IRS.
How Much Would an LLC Cost?
The cost of an LLC depends on the state in which it is formed. Most states require a filing fee, which can range from $50 to $500.
In addition to the filing fee, you will also need to pay an annual fee to maintain your LLC. This fee is usually around $100.
How Long Does It Take To Form an LLC?
It usually takes around two weeks to form an LLC. This timeframe can vary depending on the state in which you are forming your LLC.
Why Get an LLC...
In conclusion, there are a number of reasons why you should form an LLC. Some of the key advantages include pass-through taxation, personal liability protection, and the ability to build business credit.
It is important to stay on top of your state's annual report and tax filing deadlines, in order to maintain good standing with the government.
If you're still on the fence about forming an LLC, consult with an attorney or accountant who can help you weigh the pros and cons.