When it comes to establishing your business, there are several different ways to go about it. From a corporation to a sole proprietorship, there’s a number of “business types” to choose from. A Limited Liability Company (LLC) is among one of the most popular forms of businesses.
Jam-packed with benefits, this flexible and simple business entity has a wide variety of different purposes. Moreover, forming an LLC is an inexpensive and straightforward way of structuring your small business.
An LLC is a hybrid business structure that incorporates the tax advantages of a partnership with incredible liability protection.
Just because an LLC has so many benefits doesn’t necessarily mean that it matches your business needs. This is why it’s vital you do some reading to determine whether an LLC is right for your business or not.
In this article we go over the top reasons’ businesses prefer to establish LLCs.
- 1 What is a Limited Liability Company (LLC)?
- 2 How to Set Up a Limited Liability Company
- 3 Pros of Limited Liability Company
- 4 Cons of Limited Liability Company
What is a Limited Liability Company (LLC)?
LLC, otherwise known as a Limited Liability Company, refers to a popularly used business structure. LLCs give businesses strong protection like corporations. The benefit, however, is that the structure is less complex to establish and maintain.
Businesses’ may choose to be taxed either as a separate entity or a sole proprietorship. Moreover, an LLC can contain one or multiple members, i.e., the official owners. These members may be businesses or individuals, and there’s no definitive number of members an established LLC may have.
How to Set Up a Limited Liability Company
Setting up a limited liability company is a comparatively straightforward process. The multistep process of launching your LLC is as follows:
Choosing a Name
First and foremost, businesses need to register an original and unique name in whichever state they plan to do business. Moreover, in order to ensure your desired name is unique, businesses should conduct a thorough search of county clerks’ offices, online directories, and the secretary of state’s website, and whatnot depending on where you plan to do business.
Furthermore, businesses may reserve their selected LLC name for a certain period of time by paying a small fee.
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Select a Registered Agent
A majority of states require LLCs to appoint a registered agent who receives official correspondence for their business. Assigning the position prior to filing the necessary articles is critical since states request you to add the registered agent’s name and address as well.
A company may designate the role to someone within the company. If the company’s management does not have a registered agent, there are third-party companies that act as registered agents and take care of all of the paperwork involved.
Filing Articles of Organization
Simply put, Articles of Organization are documents that business owners must file to legally establish a business. This step is crucial in the formation on an LLC.
The requested documents depend on the state you reside in and the state that you wish to form your LLC.
Now, if you’ve crafted your business plan thoroughly, it won’t be challenging to dig out the necessary pieces of information.
Typically, Articles of Organization comprise of information such as LLC’s name, address, and owner names. However keep in mind that each state has different forms and processes. For a closer look on filing Articles of Organization, be sure to do your research.
Getting an Employer Identification Number (EIN)
Most business are required to have an EIN by the IRS. It refers to a nine-digit number provided to businesses for taxation purposes.
This step is indispensable for LLCs since state laws classify them for federal tax purposes as a partnership or corporation.
Devise an Operating Agreement
The Operating Agreement is a key document that outline the financial aspect and functional decisions including of a businesses.
More specifically, Operating Agreements contain specific personal information relevant to your management structure, ownership breakdown, the power and duties of each member and manager, member voting rights, and how losses and profits are distributed.
Here your business may choose between a written or oral agreement on the basis of where you’re establishing your LLC.
Create a Business Checking Account
It’s good to draw a line between your business and personal affairs. Establishing a separate bank account ensures your business assets don’t interfere with your personal ones. That way, you can rest assured your personal assets won’t be at risk in case of a lawsuit.
Pros of Limited Liability Company
The benefits of establishing a limited liability company are countless. Below we discuss a couple of reasons you should choose an LLC as your business’s structure:
- The initial paperwork and fees of an LLC are pretty straightforward. It is important to not that they vary from state to state.
- Limited liability companies are super flexible and lack a wide variety of corporate regulations. For instance, it’s not essential that LLCs hold shareholder meetings. Moreover, you can easily modify LLCs according to business needs.
- LLCs offer creator flexibility to choose the management system. Multiple members may run your LLC, which ensures all owners participate in decision making. Moreover, an LLC manager may be a member of the company or someone from outside.
- A soft advantage of forming an LLC is that small businesses and startups can make their business seem more authentic and official. By boasting the fact that your business is registered by the state, you allow consumers to see your organization as a legal and genuine entity.
Cons of Limited Liability Company
Here we’ve rounded up a number of reasons business avoid forming an LLC:
The Price Tag
Forming an LLC typically costs more than a general partnership or sole proprietorship. Most states include an initial formation fee, alongside ongoing fees like franchise tax fees, annual reports, and so on. It’s best to contact the secretary of state’s office to ensure you comply with the rules and regulations.
Transferring ownership in an LLC is a is known to a pain. Where corporations allow the selling of stocks, LLCs require all members to agree to the addition of new members or decrease the number of existing members.
The Limits of LLC
Although an LLC protects your personal assets there are limits it its protection. In case the even that your facing a law suit and you act improperly or negligently with your business, the judge may announce that your selected LLC structure doesn’t ensure the safety of your personal assets.
This is called piercing the corporate veil or lifting the corporate veil.
It may occur if your business transactions aren’t separate from your personal transactions or if past records show that you run your business fraudulently, causing substantial losses for others.