When starting a business, one of the first decisions you have to make is the structure you are going to use. The structure you choose has an impact on various things, including the kind of contracts you can get into, your capital raising options, and the kind of partnerships you can create. With this being said, people prefer LLCs over alternative business structures like corporations or partnerships and sole proprietorships for various reasons. Perhaps the sweetest spot is the fact that it offers liability protection, cost savings, and tax advantages, among other benefits.
But is an LLC the best structure for you? How do you start one and what do you need when forming one? In this blog, we will look at what you need to know about creating an LLC and getting started.
One of the biggest advantages of going for a business structure like an LLC is the liability protection it offers. If a business is a sole proprietorship or a corporation, the owners or shareholders can be held personally liable for all of the business debts. An LLC, on the other hand, can protect the owner from being held liable for any debts.
1. What Is an LLC?
By simple definition, an LLC is a business structure; somewhat of a hybrid between a corporation and a partnership… it’s the middle ground. With an LLC, owners get the best of both worlds between the benefits of a corporation and a sole proprietorship. They can limit personal liability while getting some taxation benefits and operational flexibility. The LLC structure is recognized by all the 50 US states. Simply put, there are many reasons to add “LLC” to your business name. Some of these include:
- Creating a separate identity from your personal name
- The legal protections that an LLC offers to its owners
- Financial benefits of operating as an LLC
2. Setting It Up Is Not Hard
More and more people are opting for the LLC business structure these days, thanks to its incredible ease of setup compared to launching a corporation. For starters, less paperwork is involved, plus the costs of setting up an LLC are significantly lower. However, the regulatory requirements and setup fees may vary from one state to the other. Whether or not you are a US resident, a recent article at financepond.com/llcs/best-state-to-form-llc provides tips on choosing the best state to form an LLC. The procedural requirements will also vary between domestic and foreign LLC formation.
3. Legal Requirements for Starting an LLC
As mentioned already, starting a limited liability company comes with several legal requirements. For instance, you must have at least one member to form a limited liability company, which is a person or entity with a stake in the company. After that, you must file a document called Articles of Organization with the Secretary of State’s office. You also need to have a registered agent, who will be in charge of receiving and sending any legal and regulatory documentation exchanged between you and the state.
On top of these, a few more things should be considered, including your state’s requirements for a business address and other business permits or licenses required by the state. These may vary depending on the type of your business and its dealings, as well as the location you will be operating from. With knowledge of your state’s legal and regulatory requirements, starting an LLC becomes a smooth sail.
3. The Issue of Raising Capital
Despite having many perks, it is crucial to note that an LLC can limit your options for raising capital. The problem primarily arises when you need to raise capital from external investors to get the venture off the ground and grow it. An LLC may not be as attractive to exterior investors as a C-Corp, for instance. Nonetheless, you will still have a significant range of ways you can raise capital for your LLC business. Some of these may include the following:
- Personal savings
- Crowdfunding campaigns
- Selling property
- Loans (if you have credit)
- Angel/Seed investors
- Venture capitalists
- Support from family and friends
- Government grants and small business funding schemes
Better yet, an LLC gives you the flexibility to change your company to a C-corporation later on depending on how your business evolves.
4. Be Keen on the Taxes
LLCs are also beneficial in that they provide some tax advantages to the proprietor. For instance, the member/s can choose to be taxed as individuals, as a corporation, or as a partnership – whichever suits their personal and business needs. This also helps you avoid double taxation because the proceeds are only levied when it hits your personal accounts.
However, LLCs also have a major tax disadvantage. For instance, you might have to pay self-employment tax, which is at times higher compared to tax against company profits. When you pay tax at the corporate level, the deductibles are often higher and easier to include in the tax returns. This is all the more reason to consult an experienced accountant when choosing how your LLC will be taxed. You don’t have to incur higher costs than you should in the tax period.
To sum it up, an LLC can be advantageous in many ways. It is even more beneficial if you conduct research and understand the nitty-gritty aspects involved before getting started. Armed with the pointers above, you can approach your situation more informed to make the right moves and decisions.