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A Detailed Guide: Should You Form an LLC?

business startup

Wondering if you should form your own Limited Liability Company (LLC)?

Before you take the plunge with this structure, see our list of advantages and disadvantages of forming an LLC.

When you’re ready to commercialize your offering, the next crucial step is to legalize it with the right business entity structure.

Your choice of structure determines how it will be treated for factors like federal and state regulations, tax treatment, personal liability, etc. There are a few different types of structures including S and C corporations and a sole proprietorship, though when your business is a new startup the LLC is probably the best option.

An LLC (Limited Liability Company) is one of the easiest, fastest, and most efficient ways to start a company.

In this article, we will explore LLCs, their pros, cons, and other fundamentals you need to know before deciding if an LLC is an appropriate structure for your business.

What is an LLC?

A Limited Liability Company is a legal entity that combines some aspects of a Corporation and a Partnership. It offers you a Corporation’s liability protection and a Partnership’s tax benefits. What this means is that you are not personally liable for any liabilities and debts the company accrues.

Regulations surrounding LLCs vary depending on the state, and most of them do not restrict ownership. Anyone, including corporations, individuals, foreigners, and other LLCs, can become members (LLC owners). However, entities like insurance companies and banks cannot form LLCs.

How Do You Form an LLC?

Regulations vary by state, but there are some similarities and hee are the steps to follow when forming your own LLC.

Choose a state in which to form your LLC.

You can file the paperwork in your state, but if you plan to operate in different countries, then you can consider state-by-state requirements and taxes.

Choose and register the name of your business.

File the Articles of Organization with the appropriate agency or the Secretary of State. These documents are necessary to create your business. You need to provide details including, the name of your company, contact information, address, owners’ identities, and other necessary information.

In some states, this is all that’s required to form an LLC. However, other states may have additional requirements. You may also need other documents to help run your business smoothly in the future. For example, some states may require you to provide permits, licenses, and an operating agreement if you have more than one member. It outlines each member’s role, their rights, and how you will split losses and profits.

What Are the Advantages of an LLC?

An LLC is an excellent option for most small business owners because it limits the principal liability, and it also has other benefits.

Limited Liability

The LLC is a separate entity from the members. The members are not liable for any debts or losses. The exception to this rule is if they’ve signed a personal guarantee.

No Formal Records

Members do not need to record resolutions, have meetings, or keep formal minutes.

Profit Distribution

Members do not have to split profits 50-50 like in a Partnership. They can select profit distribution methods depending on what they agree on.

Taxation

Think of LLCs as pass-through entities. Members are exempt from double taxation. If there is only a single member in the LLC, the total income received via the business is taxed through the individual’s tax return.

For LLC with multiple members, the taxation is just like in a Partnership. This means that each owner gets a part of the income based on their ownership percentage. Each one of them is subject to self-employment tax.

Less Hassle

An LLC has fewer complexities in terms of costs and paperwork involved. There is also operational ease accompanied by less compliance and record keeping. Managing them is also easy since you don’t need to have a board of directors or hold annual meetings.

What Are the Disadvantages of an LLC?

Although an LLC has attractive features, there are some cons you need to know about, especially those that concern it’s structure.

Self-Employment Taxes

You are considered self-employed, once you form an LLC. It’s, therefore, your responsibility to pay your Medicare and Social
Security taxes

Limited Growth Potential

If you plan to go public in the future, then an LLC may not be the best option for you. LLC members cannot issue employee shares or take the company public.

Limited Life

Depending on the state, most LLCs dissolve or cease to exist in the case of bankruptcy or the death of one of the members.

These are just some of the consideration you need to know about an LLC. For a more detailed look at them, visit GovDocFiling infographic on LLC Facts.

Summary

In most circumstances, a new business will form an LLC unless it is an insurance company or a bank.  There are other options for startups however including registering as a freelancer or sole proprietor however an LLC is the most popular structure.

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