Advantages of Forming an LLC
Learn why this business structure is a great option for entrepreneurs
By: Melanie Shires, PCC
Whether you are a new start-up or have been operating for some time as a sole proprietor or in a general partnership, there are many benefits of incorporating your business as an LLC which typically outweigh any perceived disadvantages and unavailable to a sole proprietorship and general partnerships.
What is an LLC?
A limited liability company, or LLC, is a hybrid business structure that combines the simplicity, flexibility and tax advantages of a partnership with the liability protection of a corporation.
An LLC can have one or many “members,” the official term for its owners. Members can be individuals or other businesses, and there is no limit to the number of members an LLC can have. With an LLC structure, members’ personal assets are protected from the business’s creditors.
Recognized as the Sole Owner: Entrepreneurs are self-starters who prefer to pave their own way. Most states recognize a single member or owner LLC which means that you can be the sole owner of your business. As a single member LLC, you can make your own business decisions without having to consult with and receive approval from other partners in a general partnership or a board of directors in a corporation. Like a sole proprietor, you own, manage, and operate your business, but without the same liability issues of a sole proprietor. If there are two or more owners, you can enter into an operating agreement to define your roles and obligations and to structure your business in a way that best suits your needs.
Limited Personal Liability: An LLC is viewed as a legal entity separate from its individual members or owners. Like shareholders of a corporation, LLC members or owners aren’t personally liable for actions of the company. The LLC member or owner may lose their capital contribution to the business, like shareholders. However, unlike a sole proprietor or general partner, an LLC’s legal obligations usually do not put the member or owner’s personal assets — homes, cars, bank accounts, investments — at risk.
Limited Personal Liability: Standard corporations typically face the burden of double income taxation. The corporation’s profits are taxed as income and shareholders must pay income taxes on any dividends. An LLC is a pass-through entity, meaning its profits go directly to its members or owners without being taxed by the government on the company level. Instead, they’re taxed on members or owners’ federal income tax returns. This makes filing taxes easier than if your business were taxed on the corporate level. And if your business loses money, you and other members can shoulder the hit on your returns and lower your tax burdens.
Less Administrative Paperwork: Establishing and maintaining an LLC is less complex and requires less paperwork than other corporate entities. An LLC registers its existence by filing articles of organization with and paying a fee to the relevant state office, normally the secretary of state. The process is simple enough for members or owners to handle without special expertise, though it’s a good idea to consult a lawyer or an accountant for help. Ongoing requirements usually come on an annual basis.
Management Flexibility: An LLC can opt to be managed by its members, which allows all owners to share in the business’s day-to-day decision-making, or by managers, who can be either members or outsiders. This is helpful if members aren’t experienced in running a business and want to hire people who are. In many states, an LLC is member-managed by default unless explicitly stated otherwise in filings with the secretary of state or the equivalent agency.
Steps to Form an LLC
Choose a name: Register a unique name in the state where you plan to do business. To make sure someone else doesn’t have your business name, do a thorough search of online directories, county clerks’ offices and the secretary of state’s website in your state. For a fee, many states let applicants reserve an LLC name for a set period of time prior to filing articles of organization.
Choose a registered agent: The registered agent is the person you designate to receive all official correspondence for the LLC. It’s crucial that you determine who this person will be before filing articles of organization, because states generally require you to list a registered agent’s name and address on the form.
File articles of organization: This is the step that essentially brings your LLC into existence. States request basic pieces of information about your business, which, if you’ve thought through your business plan and structure, should not be hard to provide. You’ll be asked to supply details like name, principal place of business and management type.
Get an employer identification number: You should get an EIN, employer identification number, which is a nine-digit number assigned to businesses for tax purposes. The rule applies to LLCs because they’re classified for federal tax purposes as either a corporation or a partnership.
Draw up an operating agreement: Your operating agreement should include specific information about your management structure, including an ownership breakdown, member voting rights, powers and duties of members and managers, and how profits and losses are distributed.
Publish a notice in a local newspaper: Some states require LLPs to publish a newspaper notice to alert the public of their business’s registration.
For all the reasons mentioned in this article, an LLC can be a great option for entrepreneurs formally structuring their business. It can provide the right balance of legal protections and benefits.
As a business coach, I always encourage clients to consult with an attorney and/or an accountant as they are considering their options when formally structuring their business.
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