You want to start a business and you know the importance of getting started the right way.
That’s why you’re considering what business structure is best for you.
Questions like what is an LLC, why form an LLC, and even do I need an LLC all come to mind and you’re just lost.
You’ve come to right the place!
As a business lawyer, I’ve assisted countless individuals just like you determine if an LLC is a good choice for your business or not.
This article was written with you in mind – to provide you with solid information that may help you make a decision.
Remember, help is just an email away.
Reach out to me at [email protected] to schedule your consultation to discover why LLC may be right for you.
What is an LLC Company?
An LLC company is a company that enjoys the limited liability benefits of a corporation and the flexibility and efficiencies of a partnership.
LLC stands for Limited Liability Company, and this type of legal structure is often referred to as a hybrid structure because it combines features of a corporation and a partnership together.
An LLC is a separate legal entity, but the government doesn’t recognize it as a separate tax entity.
How Do You Become an LLC?
To become an LLC, you need to choose a name for your business, file certain documents and pay the required fees, create an operating agreement, obtain an EIN, and apply for any required licenses and permits.
A business lawyer can walk you through the necessary steps and draft the required documents. Contact me at [email protected] to start the process to become an LLC.
Why Form an LLC?
You may want to form an LLC to take advantage of the protection the structure offers its owners.
Since it is a limited liability company, you aren’t personally responsible for the debts and liabilities of the business.
This means that you won’t have to worry about losing your assets or being sued personally.
Another reason to form an LLC is to make your business look more legitimate, trustworthy, and professional.
Lenders, suppliers, and customers don’t want to do business with just anyone. They want to do business with an actual company.
Should I Form an LLC?
You should form an LLC if you worry that you could personally face debts or lawsuits pertaining to your business.
There are limitation to who can form an LLC, which is something I would be happy to discuss with you further if you email me at [email protected].
In general, you can’t form an LLC if your business is a:
- Insurance company
In some states, you can’t form an LLC if you are a doctor or other licensed healthcare worker, an accountant, or an architect.
If you are unable to form an LLC, it would probably be in your best interest to form a corporation instead.
How Do I Create an LLC?
You create an LLC by naming your business, filing operating documents, paying fees, creating an operating agreement, obtaining an EIN, and applying for any necessary licenses and permits.
Let’s look at each step in more detail:
1. Naming Your LLC
Your state may have specific rules for naming your LLC.
I general, the requirements for an LLC name are:
- The name must be different from all other LLCs on file.
- The name must end with one of the following: LLC, L.L.C, Limited Liability Company, Limited Company, or Ltd. Liability Co.
- The name must not include terms not allowed by the state. These terms vary, but in general include bank, corporation, insurance, and city.
2. Filing Documents and Paying Fees
To create an LLC, you have to file a document called the Articles of Organization. In some states, it may be called the Certificate of Organization or the Certificate of Formation.
You should work with a business lawyer and have him or her draft and file your documents.
Each state has specific requirements for creating an LLC, which is something you’d want to consult with a business lawyer about.
With an LLC, you have to pay a filing fee. The amount varies by state and can be as little as $50 or as much as $500.
However, some states have additional taxes or fees. For example, LLCs in California have to pay an $800 tax annually by filing Form 3522.
You do have up to four months from formation before you have to pay that fee.
There are late fees associated with Form 3522, so it’s important that you fill it out on time and fill it our correctly. For help, email me at [email protected] and I will be happy to assist you.
3. Draft LLC Operating Agreement
An Operating Agreement is a document that details the ownership and operating procedures of your company.
You should have your business lawyer draft an operating agreement for your LLC to ensure it’s legal and thorough.
Your Operating Agreement should include:
- Full names for all members
- The name of the LLC
- The date the document becomes valid
- The principal place of business
- Initial contributions each member makes (if any)
- Each member’s duties and responsibilities
- Details of distributions
- Details about the required meetings
- How ownership can be transferred
4. Apply for an EIN from the IRS
EIN stands for Employer Identification Number and it is assigned by the IRS.
If you have a United States social security number, the process can be done online and is quick and easy.
If you don’t have a social security number, you can still obtain an EIN.
Read more about how to obtain an EIN without a social security number here.
Also, before you can open your business, you may still need certain licenses and permits for your business.
The above steps are essential to create an LLC, but you don’t have to figure it all out alone. Email me at [email protected] and I’ll be glad to help you every step of the way.
When to Form LLC?
If you already have an existing sole proprietorship or partnership, you may want to convert you structure to an LLC as soon as you have consistent business.
If you are an individual looking to start a new business, you may have specific reasons for choosing a sole proprietorship or partnership.
However, you should weigh your options carefully because chances are, you may end up wanting for form an LLC in the future to protect yourself from the business debts and liabilities.
So really, the answer to when to form LLC is as soon as possible.
What are the Benefits of Being an LLC?
The benefits of being an LLC are limited liability for its owners, flexibility, and pass-through taxation.
LLCs provide members with certain protections from liability and debts of the business. The LLC works much like a corporation in this way.
There are exceptions to the limited liability an LLC provides. You may be held liable if you:
- Directly injure someone.
- Personally guarantees a debt or a loan that the LLC later defaults on.
- Fail to deposit employees’ taxes withheld from their wages.
- Do something fraudulent, reckless, or illegal intentionally that harms the business or another person.
- Treat your LLC the same as your personal affairs instead of as a separate entity.
LLCs are popular because they offer more flexibility than other legal structures.
There is less paperwork involved and the requirements for compliance aren’t as tough.
It’s easy to form an LLC and easy to keep it in good standing.
An LLC isn’t considered a separate entity for tax purposes. This is called pass-through taxation.
Depending on how your LLC is ran and how many members you have, your taxation may vary.
- Single member LLCs are taxed like sole proprietorships using the member’s own tax return.
- Partners in an LLC: Usually choose to be treated as a partnership for taxation.
- LLC filing as a corporation: You may choose to file your taxes as if you were a corporation in some cases. Note that some businesses are automatically classified as a corporation.
This is why an Operating Agreement is so important. It’s the document that will define how you’ll treat taxes so there’s no confusion among members.
If you have any questions about the benefits of an LLC, email me at [email protected] today.
Why an LLC is Better?
In some cases, an LLC is a better business structure than the alternatives because it provides the same limited liability but offers pass-through taxation and is easy to form and easy to maintain.
Can You Have Employees in an LLC?
Yes, an LLC can have employees. In fact, the number of employees isn’t limited.
Can You Go Public with an LLC?
No, you cannot go public with an LLC.
What are the Tax Benefits of an LLC?
The tax benefits of an LLC are that it is not considered a separate entity for taxation purposes and therefore, the business isn’t taxed at the corporate level.
It’s important to understand your federal tax obligations as an LLC so your business is always compliant.
Pass-through taxation is beneficial because it means that money from the business is only taxed one time, at the personal level. This can result in significant tax savings.
Additionally, the members of the LLC have the ability to claim their share of any business losses on their own income taxes, which can be helpful in the startup years.
If you have more questions about your tax liability as an LLC, contact me at [email protected] and I can explain it in more detail.
Why Have an LLC: Exploring LLC Benefits and Disadvantages
LLC benefits include pass-through taxation, limited liability for owners, and more flexibility than other structures.
LLC disadvantages include limited life, no specific member roles, and self-employment taxes.
Let’s explore the benefits and the disadvantages in more detail, side-by-side:
LLC Benefit: Pass-through Taxation
Pass-through taxation is a major benefit of an LLC because it eliminates taxation at the corporate level.
LLC Benefit: Limited Liability
The limited liability that an LLC provides is just like the protections of a corporation, but without all of the strict compliance, regulations, and paperwork.
This is one of the main reasons an LLC is a popular business choice for many.
LLC Benefit: More Flexibility
With an LLC, you have more flexibility in the form of less paperwork and lenient regulations and compliance requirements.
Additionally, you can start and maintain an LLC easier than any other corporation.
LLC Disadvantage: Limited Life
An LLC has a limited life and this is the main disadvantage that it faces. What does a limited life mean?
It depends on the jurisdiction, but in some cases, if a member passes away, the LLC dies with them.
In other cases, an LLC has a life of only 30 years.
The good news is that if you work with an experienced business lawyer, you may be able to use your Operating Agreement to eliminate this disadvantage.
LLC Disadvantage: Lack of Member Roles
Corporations have specific member roles, but an LLC does not.
This can get confusing and leave members and investors unclear on who’s really in charge.
By specifying each member’s duties in your Operating Agreement, this disadvantage is no longer a problem.
LLC Disadvantage: Self-Employment Taxes
LLCs usually have to pay self-employment taxes unless they choose to be treated as a corporation for taxation purposes.
Since the LLC is a pass-through entity and taxation doesn’t occur at the corporate level, it happens at the personal level.
Which means that you have to pay self-employment taxes that are sometimes higher than taxes would be at the corporate level.
This can be frustrating and confusing, so it’s best to consult with a lawyer or accountant so you’re crystal clear on how taxation works and what makes the most sense for your business.
A quick email to me at [email protected] can answer your questions about how the benefits and disadvantages apply to your business.
To sum it all up, the answer to why form an LLC, is because you want to enjoy the ease and flexibility an LLC structure offers while protection yourself and your assets from the business debts and liabilities.
Forming an LLC is a great option to establishing a legitimate, recognized business without all the stress and costs of forming something more formal such as a corporation.
Now that you’ve read more information about LLCs, you should be better equipped to make a smart decision for your business.
If you’re ready to take that next step and get this process started, email me at [email protected] and we’ll get started today.