So you have taken the big step to start a business. AWESOME! The first thing you should do is create a business structure to protect yourself and your business.
The LLC is currently one of the most popular and prevalent business forms in America (so you’re in good company if an LLC is right for you).
One of the biggest reasons people decide to form an LLC is for its protection in legal matters, should you form an LLC?
LLC’s allow you to separate yourself from your company in the event of something happening that will involve your company’s money, property, etc. It’s important to note that some states have different requirements when filing for your LLC. You can find more information regarding your specific state here.
It can cover its owners with limited liability in many jurisdictions. A limited liability company (LLC) is a hybrid legal entity. An LLC is a legal form of a company, not a corporation in and of itself.
The business structure of an LLC combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
It has elements of both a corporation and a partnership (or sole proprietorship).
An LLC’s income is taxed at individual tax rates. A partnership formed by multiple members is the default tax status for an LLC. If there is just a single member, an LLC is federally taxed by default as a sole proprietor.
An LLC and its members simply cannot commingle funds. The charging order mechanism protects membership and partnership interests. An LLC also might be organized as a not-for-profit.
Vocabulary Differences: There’s a lot of fancy terms to know to completely understand if an LLC right for you.
An LLC is said to be “organized” and not “incorporated” or “chartered” at its founding. 2. Its establishing document is known as its “articles of organization.” 3. Internal operations are dictated by an “operating agreement.” This is an agreement amongst the members of an LLC; it is not recorded with the state in which it was born. 4. The recipient of beneficial rights is called a “member.” 5. Lastly, ownership is represented by “membership interests” or “LLC interests”, not “shares”, as reflected in physical documentation of ownership rights on a “membership certificate.”
Despite these unique verbal attributions, however, LLC members are subject to the same legal standards to which corporate shareholders are subject. But an LLC has fewer formalities to maintain and minimal compliance requirements which can make things easier.
There are many advantages to adopting an LLC business structure:
It’s cost-effective: Startup costs to file an LLC are relatively low and affordable for business owners.
Flexibility: Perhaps most widely recognized is the flexibility an LLC structure grants business owners. In most cases, an LLC can use corporate tax rules to avoid being treated as a partnership, the default tax status. This flexibility is especially ideal for a single business or company owner. One person calls all the shots.
Autonomy: An LLC can have greater autonomy than a traditional corporation; as a hybrid, it is subject to fewer tax regulations and restrictions. Its operating agreement just needs to remain within the confines of state law.
Savings: Because a corporation is taxed once at the corporate entity level and again when distributed to shareholders, and an LLC is only taxed once at individual rates, an LLC can, therefore, save a lot of tax money.
Tax choice: An LLC also has the choice of how it would like to be taxed; it’s easy to bypass default tax status. It can decide to be treated as a sole proprietor, partnership, S corporation or C corporation.
Enjoy some legal protection: The owner or owners of a limited liability company enjoy protection from, you guessed it, liability for actions and debts of the LLC. Don’t let disgruntled customers or businesses come after your home, car or bank account; get your LLC today.
Fewer requirements for members: The LLC structure demands fewer membership requirements. It makes no difference if there are a thousand members or just one, and there are no demands of members (like United States citizenship or residency).
Less paperwork: An LLC requires noticeably less stringent record-keeping and administrative paperwork and documentation than does a corporation.
More intimate taxing: Profits are taxed more personally, at the member level and not at the LLC level. That is the beauty of pass-through taxation.
Separation of yourself from the business: The LLC is commonly treated as an entity separate from its members, so they cannot be held personally liable for its operation. This grants more freedom to its members who are not legally responsible for its day- to-day happenings.
It’s cool to fly solo: As previously mentioned, membership can be limited to just one person and and LLC will still run smoothly.
Property ownership: An LLC can own as many properties as it desires. In some cases, a different LLC will own each individual real estate property so that both the owners and other properties will be protected from cross-liability.
While there are far fewer disadvantages to filing an entity as a limited liability company (LLC), the limitations are still worth noting.
Broadly, it is important to note that many of the aforementioned advantages or benefits of forming an LLC can be construed negatively. The flexibility and choice allowed for in a limited liability company denote the absence of statutory provisions. In all honesty, there is a lot for an LLC member or members to figure out alone, without any official legal rules or outside intervention. It’s hard work. On that note, a limited liability company has no strict management structure to which it must adhere. It is not required to have a board of directors or even officers. Other companies might have a hard time figuring out who has the authority to enter into a contract on the LLC’s behalf. It is freedom but also perhaps a little confusion.
Money might not come easily. People typically feel less comfortable investing financial capital in a limited liability company than in a well-understood corporate form. An LLC may struggle to raise finances.
Termination is easy. Any single member departing in LLC can dissolve it. Corporations can still exist regardless of the coming and going of shareholders. If forming an LLC, it is important that all members are 100% to making it work for the long haul.
There is often a franchise tax or capital values tax imposed on limited liability companies. Check to see if this tax applies in your jurisdiction (and how much it is)!
Renewed filing fees might be just as expensive as they are for corporations. It might be more cost-effective in the beginning to structure an entity as an LLC, but some state jurisdictions make sure that maintaining one is just as expensive!
It is almost a certainty that international jurisdictions will disregard an LLC business structure and treat it as a corporation for tax purposes. The LLC structure hardly exists outside of the United States. It is mostly a domestic thing.
So is an LLC right for you? Consider the following:
No two businesses are the same and no single piece of online content can dictate what an individual or individuals should do.
If you might be considering structuring an LLC, understand the advantages and disadvantages broadly and apply them to your own business. An LLC is generally an excellent choice for small business owners, as it provides limited liability protection without too many additional complexities. Just be sure that you are permitted to form an LLC under state law.
It is also important, anywhere, to keep business assets separate from personal finances. This might seem like a no-brainer, but there are many seemingly harmless mishaps when it comes to banking for an LLC, since it is a more unique hybrid.
The potential liability of an LLC member is limited only to whatever he or she has invested in the LLC. If you ever want to make changes to your LLC’s key documents, like the Articles of Incorporation or Articles of Organization, you must file in amendment with your secretary of state.