Looking to start a business? If you have an idea for a business, there are a few things you need to consider before you can get the ball rolling. One of those things is how you plan to legally structure your business.
There are many different types of business structures in the United States, all of which have their own unique purposes and benefits. One of the most popular structures for a business is what is referred to as an LLC.
Table of Contents
What is an LLC?
An LLC, or a Limited Liability Company, is a business structure constructed in accordance with state law. An LLC owner is called a member, and there are no rules to how many or how few members there are. That means a single person can form and operate an LLC.
LLC’s can be classified as either a corporation or partnership depending on several different factors like how many members there are as well as the forms filed during the formation of the entity. Different types may choose to file differently in terms of classification.
The types of businesses that can be structured as an LLC varies however there are a few types of businesses that absolutely cannot be LLCs. These business types include those that fall into the banking and insurance categories.
Who should form an LLC?
If you would like to start a business, you should first check with the laws in your state to see if the type of business you plan to start can legally be an LCC under state law. Any one person or group of individuals looking to start a business should consider starting an LLC for business types that qualify.
LLCs are a popular choice for small businesses of different kinds, from web development companies to businesses that offer plumbing services. In addition to banks and insurance companies, depending on the state, a business may not be eligible to operate as an LLC if the company offers professional services related to healthcare, like a doctor’s office.
LLC vs sole proprietorship
Sole proprietorships and LLCs are two of the most common structures for small businesses in America today. That being said, there are a few main differences between them.
- Sole proprietorships are run by one single person whereas an LLC has no limit to the number of people in charge.
- Members of an LLC and the LLC itself are considered separate entities. This means that the members of an LLC will not be held liable for legal matters or business debts. On the other hand, with a sole proprietorship, the business owner will be held liable.
- In an LLC, you must be careful to not mix personal funds with business funds. In a sole proprietorship, it does not matter.
Benefits of an LLC
There are many benefits of forming an LLC. That’s why so many LLCs are started each and every year. In fact, there are currently over 6 million LLCs in the USA today.
Personal asset protection
At the end of the day, a member of an LLC only risks the amount of money or assets that the said person invests into the company. The members personal bank accounts and assets are not put up to risk, only the assets of the company.
This means that if an LLC gets in trouble in terms of business debt or any other problem that arises, a collection company can’t come knocking on the door in pursuit of your personal assets. Your personal house, cars, and other high-value assets are safe.
All LLCs are taxed through something called pass-through taxation. This means that profits flow directly to the members before they are taxed as earned income for those members.
For this reason, profits are only ever taxed once and once only unlike with certain types of corporations. Pass-through entities are also responsible for paying a specific portion of their profits in the form of employment taxes.
Starting an LLC is relatively simple once you have the exact structure of your business figured out, as well as a clear understanding of each of the members’ rights and responsibilities. Duties, roles, liabilities, and rights will all be outlined in the Articles of Organization.
They are also relatively easy to maintain once you get them up and running. There are a handful of tasks that need to be completed annually, including taxes, potential licensing, and annual reports. The bottom line is that anyone who wants to form an LLC can do so, no matter where they live.
LLCs are known for their flexibility in terms of the ability of the members to make changes to operating agreements. As the needs of an LLC change, the operating agreement can also change through modifications or amendments.
This is a major difference between corporations and LLCs. It even applies to the voting rights of each of the members.
Customers will often prefer to work with an actual business as opposed to an individual. An official company will increase your credibility, and you will also be able to work with an official business name. You might even choose to launch a website. With a real business, you can build confidence in your potential customers by improving your trustworthiness and authority.
Disadvantages of an LLC
LLCs aren’t right for everyone. In some cases, the disadvantages of an LLC may prompt some business owners to operate under a different structure.
Starting a business comes with a wide range of expenses. This is no exception when it comes to the formation of an LLC, and some states have dramatically higher entry price points. The cost of starting an LLC from one state to another can range from $50 to $500.
Sometimes, the main benefits of forming an LLC can seem like disadvantages to those who are looking to invest. For example, an investor might not want to complicate their own personal tax situations by becoming a member of an LLC, which has a pass-through tax setup by default.
Other common reasons investors may not choose to invest in an LLC include the fact that they don’t want to have to pay taxes in multiple states. Another possibility includes that they have chosen or prefer to invest in a C corporation, as well as various other stockholder rules.
Another main reason an investor might shy away from investing in an LLC is that they don’t have confidence in the members or the way that the operating agreement was constructed. Ultimately, when an investor puts money into an LCC, they are investing in a human being, and this is something that is always taken into consideration.
In some instances, the tax structure of an LLC may be considered a disadvantage due to Social Security and Medicare taxes. Since profits and not just personal income are taxed, you may end up paying more in taxes percentage-wise than someone who is running a corporation, depending on your take home salary.
Since LLCs don’t have stock shares, the transfer of ownership can sometimes be more difficult than that of a corporation. This is especially true when a multi-member LLC is trying to conduct a change in member ownership.
How to set up an LLC
Setting up an LLC involves several simple steps that anyone can follow. At the end of the day, all you need is one founding member who is willing to complete the necessary steps.
Choose a business name
Different states have different laws regarding the process of naming your LLC. That being said, there are a few common guidelines that typically apply to all 50 states.
These include refraining from naming your business something that could be confused with a government entity, like the FBI. You’re also not supposed to use terms that are associated with businesses that are prohibited from being formed under an LLC, like a bank. You also cannot include the term LLC as part of the business name.
Business names that aren’t the members’ actual legal names are referred to as fictitious names. For example, instead of calling a cab company Jane Doe, a proper fictitious name would be Jane’s Taxis. Fictitious names are commonly used in order to increase branding power and attraction to the company.
Create and file articles of organization
The articles of organization are required in order to form an LLC. These official documents will outline the duties, rights, liabilities, and other responsibilities of each member of the LLC. They are sometimes referred to as a certificate of organization or a certificate of formation. There is a fee associated with filing the articles of organization.
Appoint a registered agent
Upon the formation of an LLC, most states require that the company chooses a registered agent to help bring the company under compliance with the law. Registered agents are individuals or entities that are responsible for government correspondence as well as filling out compliance forms.
Can you be your own registered agent? As long as you are 18 years of age or older and you meet a few other sets of criteria, then it is perfectly acceptable to be your own registered agent. You can also ask a friend or a family member to take on the responsibility for you.
Pay the required fees
Fees may differ depending on the state you reside in, but common fees include submitting the articles of organization, registering as an agent, and purchasing your business licenses. If you choose to hire a firm to submit documentation on your behalf, then there may be a number of other fees associated with hiring a firm.
Publish a notice of intent to create an LLC
There are a handful of states that will require you to publish a notice of intent to create an LLC. This means that an announcement must be made in a legal newspaper announcing that your LLC has been or will be formed. The newspaper is usually required to be published in the same county in which you plan to form and operate your LLC.
Create an LLC operating agreement
The purpose of the operating agreement is to govern the internal affairs of your business, including the functional decisions including rules, regulations, and provisions. It isn’t mandated as a requirement for every single state, but it is always recommended to create one. It should be outlined to suit the specific needs of the business owners.
Obtain an EIN
LLCs with more than one member will need an Employee Identification Number (EIN). EINs act like Social Security numbers for your business, and they are used by the IRS to keep track of related tax information on an annual basis.
Decide if you’re ready to start an LLC
Knowing the ins and outs of what an LLC is and who should start one is a key component of deciding if an LLC is right for you. Many small businesses all over the country choose to file as an LLC due to the many advantages that forming one offers.
At the end of the day, your choice will come down to the specific needs of the business as well as the founding members. Just make sure you check the exact rules and regulations that the state you reside in has in place in terms of starting an LLC.
What is the purpose of getting an LLC?
The purpose of starting an LLC is to make a business an official entity as it pertains to state law. There are many benefits to structuring a business as an LLC, including tax reasons, liability, and other advantages.
What is the difference between a business and an LLC?
A corporation has stockholders, while an LLC has individuals who invest in the company’s assets themselves.
Which is better a corporation or an LLC?
There are different reasons one would choose a corporation or LLC. However in general, LLCs offer a much more flexible structure compared to a corporation.