There are a range of business structure options available for people starting their own company: corporations, partnerships, a sole proprietorship and LLCs to name the main options.
In many cases, the LLC will be the best structure from the point of view of protecting your personal assets, reducing complexity and set up costs and operating in a tax efficient way.
In this article we describe the advantages of using a limited liability company (LLC) to set yourself up in the business.
Five Reasons to Use an LLC
Here are some reasons why people starting a business should consider using a Limited Liability Company (LLC):
- Personal asset protection: One of the most significant advantages of an LLC is that it provides l protection to its owners. In the event that the business is sued or goes bankrupt, the personal assets of the owners are typically protected from seizure by creditors.
- Pass-through taxation: LLCs are typically taxed as pass-through entities, which means that the profits and losses of the business are passed through to the owners and reported on their personal tax returns. This can simplify tax filing and reduce the overall tax burden for the business.
- Flexibility in management and ownership: LLCs offer flexibility in terms of management and ownership, as the structure can be tailored to the needs of the business. Owners can choose to manage the business themselves or hire outside managers, and ownership can be divided among multiple members or held by a single person.
- Ease of formation and maintenance: LLCs are relatively easy to form and maintain, with fewer requirements than other business structures such as corporations. They typically require less paperwork and formalities, making them a more affordable option for small businesses.
- Credibility and professionalism: Operating as an LLC can lend credibility and professionalism to a business, particularly in industries where LLCs are commonly used. This can help to establish trust with customers, suppliers, and other stakeholders.
Overall, using an LLC can provide many benefits to entrepreneurs starting a business, including personal asset protection, pass-through taxation, flexibility in management and ownership, ease of formation and maintenance, and increased credibility and professionalism.
How To Start an LLC
- Choose a name: Choose a name for your LLC that complies with your state’s naming requirements and is not already in use by another business. Many states require that the name include the words “Limited Liability Company” or an abbreviation, such as “LLC.”
- File Articles of Organization: File the Articles of Organization with the Secretary of State or equivalent organization in the state where you plan to form your LLC. This is typically done online or by mail, and requires payment of a filing fee.
- Draft an Operating Agreement: Draft an Operating Agreement, which outlines the ownership and management structure of your LLC, as well as the rules and procedures for running the business. This document is not always required by law, but it is highly recommended as it can help to prevent disputes among members and provide a clear framework for decision-making.
- Obtain any necessary licenses and permits: Depending on the nature of your business, you may need to obtain licenses and permits from state and local authorities. This may include business licenses, zoning permits, and tax registration.
- Publish a notice of formation (if required): In some states, LLCs are required to publish a notice of formation in a local newspaper for a designated period of time. Be sure to check the specific requirements in your state.
- Obtain an EIN: Apply for an Employer Identification Number (EIN) with the IRS. This is a unique identifier that is used for tax purposes and is required for most LLCs.
- Open a bank account: Open a bank account for your LLC, using the EIN and Articles of Organization as proof of your business’s existence.
Overall, forming an LLC can be a relatively straightforward process, but it’s important to carefully follow the requirements in your state and consult with a legal professional if you have any questions or concerns.
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Limited Liability Company Formation FAQs
What is an LLC?
LLC is short for Limited Liability Company. It is a simple and popular business structure that offers more flexibility than a traditional corporation while providing many of the same benefits including legal liability protection, flexibility and potential tax advantages.
How do I Name My LLC?
Choose a name that meets the state’s requirements for naming and isn’t already taken and preferably can be obtained as a web domain.
How Much Does it Cost to Form an LLC?
As mentioned, that very much depends on the state. Most states charge between $50 (Colorado, Michigan, MIssouri and others) and $100, but some some will charge up to $300 (Texas). Here is a list of the costs involved in forming an LLC in all 50 states.
Do I Need a DBA or Trade Name Too?
Not necessarily. Most LLCs do not need a DBA or Trade Name. The name of the LLC can serve as your company’s brand name and you can accept checks and other payments and enter into contracts under that name. You would register a DBA in the event that you would like to conduct business under another name for branding purposes or some other reason. See more on the differences between a DBA and LLC here.
Can I Be My Own Registered Agent?
You can, provided you have a physical address in the state in which you are forming the LLC that is attended during business hours. Most people prefer to use a reputable registered agent service to avoid this requirement to be there all the time. It also protects your privacy as the name and address of a registered agent is published on company filings and is publicly accessible.
Is A Registered Agent Service Worth It?
What is the Processing Time to Form An LLC?
This ranges from one day to two weeks, depending on the state, but can usually be expedited and completed in a day or two as required. Here is a list of the filing times for creating an LLC in all 50 states.
What is the Difference between a Domestic LLC and a foreign LLC?
An LLC is referred to as a “domestic LLC” when it conducts business in the state where it was formed. A foreign LLC is the entity that you would form if you had an existing LLC that wanted to expand its business to another state.
Can I Get an EIN if I Don’t have a Social Security Number?
This question arises with foreign investors who have LLCs but don’t have a SSN. An SSN is not required to get an EIN as you can just leave that section of the Form SS-4 blank.
Do I Have to Get an EIN for my LLC?
All LLCs with employees, or any LLC with more than one member, must have an EIN by order of the IRS (Internal Revenue Service).
What is the downside of an LLC?
As discussed, an LLC offers legal protection benefits for your personal assets and potential taxation benefits. The only real downside is cost and complexity. It does cost money to start and maintain and LLC and there is paperwork to start the LLC and filings you need to do to maintain it.
Are LLCs worth it?
It depends on your personal circumstances, but for most businesses – yes forming an LLC is worth it for the peace of mind alone in terms of protecting your own personal assets.
Why do people buy houses using an LLC?
An investment property is just like a mini business and there are legal risks involved. Tenants can sue if there is an accident in the house, so many people prefer to own investment property via an LLC for this reason.