form an llc
Protect your assets and simplify your taxes with a Limited Liability Company (LLC).
Company Formation: Setting Up a Limited Liability Company (LLC)
Deciding to set up an LLC is often the first major decision you take on your journey to becoming a successful business owner. Equally, choosing this type of company formation provides benefits—and legal protection—that will help your business flourish while reassuring you that your personal risk is reduced. For this reason, setting up an LLC is popular with small-business owners who are ready to expand.
But that’s not all—setting up as an LLC gives your business an air of authority and legitimacy that will reassure both current and prospective customers.
What is a Limited Liability Company?
An LLC is a business entity that is legally distinct from its owners (also known as members). Because of this distinction, your business takes on some of the liabilities of trading instead of you and is seen as having its own assets and responsibilities, which are completely separate from yours.
For taxation, an LLC is specially designated as a “pass-through entity”. This means as an owner, you report on your business’s annual profit and loss through your personal income tax returns.
Key features of an LLC
Forming an LLC establishes your business as a separate entity to you. That means that you are not personally liable for the debts of your LLC, or legal claims made against it. For example, if a customer doesn’t pay you on time for a large order, and you can’t pay your supplier, your supplier cannot claim this against any of your personal assets.
In practice, this means that things like your car or house are safe from any debts your business might accumulate. While creditors are free to come after assets owned by your LLC, often the lack of easy-to-liquidize assets means they are more patient—allowing your LLC time to bounce back and clear its debts.
Furthermore, if your LLC is the subject of a legal dispute, you and the other members enjoy the same protection and peace of mind, knowing that your personal assets are secure from fines and fees leveled at your business.
Of course, there are obligations. You must keep your personal finances separate from your LLC, which means you will need a separate bank account, and you will need to keep accurate business records.
What are the alternatives to an LLC?
Sole proprietorship
The alternatives to forming an LLC are becoming a corporation or a sole proprietor. Usually, for small-business owners, sole proprietorship is the alternative option. In this case, you won’t have the limited liability protection of an LLC. Nevertheless, it is easy and cheap to set up (you don’t need to file for formation with the state), and it doesn’t require much paperwork to maintain.
Corporation
With a corporation, you maintain the protection of an LLC and don’t need to file profit and loss on your personal tax returns. However, you still need to file your business formation documents with the state and there are considerable extra costs and requirements. For example, the obligation to hold annual shareholder meetings and have designated roles, like a board of directors.
In general, LLCs offer much more flexibility and agility for business owners, especially in the early growth phase of a business, while still providing the reassurance of limited liability.
What are the benefits?
Knowing that your car or house is secure from creditors is one of the main reasons that business people choose to file as an LLC. However, limited liability protection (also known as personal-asset protection) is just one of the benefits you’ll enjoy after setting up as an LLC.
Pass-through taxation: In most cases, LLCs are pass-through entities. This means that the profit and loss that your business makes are passed through to you to be reported with your personal tax return. Often, this means that filing your taxes is simple because profits are only being taxed once. Furthermore, you may benefit from an additional tax deduction that applies to members of pass-through entities under the Tax Cuts and Jobs Act (2015).
Flexibility and freedom from bureaucracy: Filing as an LLC gives you the flexibility to make your own decisions about your business and choose your preferred management structure. For example, if you set up as a corporation, your business will be under more scrutiny than if you opt to file as an LLC. With an LLC, you can determine your own Operating Agreement. This is an important document that lays out how your LLC will run and is decided by you and the other members (if there are any). This alone is enough to make many business owners decide that filing as an LLC is the correct decision for them.
It’s worth remembering that while you don’t need an Operating Agreement to form an LLC if you do have one, it’s legally binding.
Your business name is protected: Registering your business name in your state means that no one else can use it. Ensuring that your name and your brand remain unique is one of the most important steps you can take to protect yourself from your competitors.
One LLC can run multiple businesses: If you decide you want to diversify your business, you can do so from one Limited Liability Company, allowing you to take advantage rapidly of new opportunities.
How many members can an LLC have?
An LLC can be formed by one member, which is called a Single-Member LLC, or it can be formed by multiple members, which is termed a Multi-Member LLC.
For taxation purposes, the owner of a Single-Member LLC will be taxed as a sole proprietor by default. This means your business will be designated as a pass-through entity and not be taxed itself.
In the case of a Multi-Member LLC, each of your members will be taxed on their distributive share of the LLC’s profits (even if that share hasn’t been distributed to them), so be prepared for cooperation with your fellow members, and note that members can have unequal shares.
If this doesn’t appeal to you, you can choose to apply for your LLC to be taxed like a corporation, and the subsequent income passed to you. Sometimes, this can lead to you paying less tax.
When you opt to become a Multi-Member LLC, you and the other members will need to decide what type of management structure you will operate under:
- Member managed – in this case, you’ll need the majority of your members to agree on major decisions like securing new loans and signing new contracts.
- Manager managed – with this designation, one member will act as an overall manager who will make operational decisions. Sometimes, the other members will take a passive income from the business and not be actively involved.
What kind of businesses can become LLCs?
Whether you are currently running a business or are still contemplating your new start-up, almost every kind of venture can file to form an LLC. Depending on your type of business, some professions in some states will need to file for a slightly different status, called a Professional LLC.
Are there any downsides to having an LLC?
- Transferring ownership: this can be harder to do than with a corporation, and if you want to add new members or change the percentages of each member’s ownership, everyone will have to agree to the change.
- International recognition: corporations are recognized internationally, but LLCs are not recognized outside of the US. This is something to think about if a lot of your business is done overseas.
- Filing costs: Whereas a sole proprietor can set up their business with minimal preparation, an LLC requires you to register with your state. This means you will need to file business documents, like Articles of Organization, pay a fee, and wait for approval before you can get started.
How to set up an LLC
You’ve decided to go with a Limited Liability Corporation for your business? So what comes next? The fastest and easiest way to file and form your LLC is to let IncReg and our team of experts do all the heavy lifting for you, setting up your LLC. Even better, we’ll take care of licensing, taxation, compliance, and registering an agent so you can concentrate on the decisions that make your business grow.
However, if you choose to go it alone, these are the steps you’ll need to take to form your Limited Liability Company:
Choose the name: This will need to be unique and unlike any other LLC name in your state. Don’t forget, your business name will end with the letters LLC, so make sure you are happy with the entire thing.
Designate a registered: You will need to nominate someone as the main point of contact for official communications. Often, this is one of the members, but if you aren’t sure who to appoint as your registered agent, we can do this for you.
File your business documents with the state: LLCs are officially formed by the state where they reside. We can take care of filing your Articles of Organization for you and also obtain Foreign Qualification for your LLC if you want to do business in another state.
Ensure you are compliant with business permits and taxation: Depending on your business, different states have different obligations for operating licenses and taxation. You must know what these are before you start trading. Alternatively, our taxation and business permit services can take care of all this, giving you the peace of mind to focus on making your business a success.