Creating a new company is a thrilling adventure. When starting a business, there are numerous factors to think about, ranging from marketing to entity formation.
Several questions may arise as you begin to put your thoughts about the formation of your Limited Liability Company (LLC) on paper. It's essential for business owners to weigh the benefits and drawbacks of any business structure they're considering, and an LLC is no exception. The advantages and disadvantages of these options will have a significant impact on the way your business functions.
Therefore, it’s wise to assess the situation thoroughly before making a commitment.
What Is An LLC?
A limited liability company (LLC) is among the most common business structures in the United States. It’s a hybrid business structure that combines the features of corporations and partnerships. An LLC can have one or more owners, who are referred to as members. Each member's ownership stake in the company may or may not be equal.
Any size of company can form an LLC. And the LLC has become a go-to business entity type, especially for startups and small businesses, due to its adaptability and widespread use.
Although most people think you must be a resident of a particular state to establish an LLC, this is not the case. A 'foreign LLC' is a business registered in one state but intending to conduct business in another. The regulations governing LLCs vary by jurisdiction. It's important to note that certain states have more lenient regulations than others.
So, if you’re planning to form an LLC in Georgia or California, consult a knowledgeable business attorney if you need assistance choosing the ideal state for your LLC.
Factors To Consider Before Forming An LLC
Here are things to think about before establishing a limited liability company:
- Personal Asset Protection
The ‘corporate veil’ is a legal protection offered to limited liability companies because of their formal status as separate legal entities. With this, you may separate your business's funds from your own.
Having the LLC itself pay for any debts or legal fees that may arise is a huge benefit of the corporate veil. Your money and property are off-limits if the business doesn't have enough money.
- Management Flexibility
When an LLC is managed by its members, all of the owners have a say in the company's daily operations, but when managed by managers, they don't have to be members of the LLC. Members who lack managerial expertise but nevertheless desire to build a successful company can benefit from this. Unless otherwise specified in the LLC's formation documents filed with the state's secretary of state or an equivalent agency, many states treat LLCs as member-managed entities.
Unlike corporations, limited liability companies (LLCs) aren’t subject to the same stringent administrative obligations. It includes holding annual shareholder meetings or having a board of directors. Instead, members of an LLC are free to form the company however they see fit.
- Flexible Taxation
The revenues of an LLC are considered personal income to the LLC's owners unless the LLC makes the decision to be taxed as a corporation (C Corp). Pass-through taxation is a system that allows individuals and small businesses to pay only one set of taxes instead of two (at the corporate level and the personal level).
However, you may be required to pay self-employment taxes regardless of your chosen tax status. Moreover, thanks to a recent modification of the tax law known as the QBI (qualified business income) deduction, LLCs can now take advantage of the federal tax deduction on pass-through income.
Although there are many benefits, the business owner's goals for the company's future and the type of business it is will largely determine which legal structure to establish the company under.
- Fees And Taxes
Although LLC members are exempt from double taxation, they must still pay self-employment taxes. The owner is both the employee and the employer; thus, they must pay both sets of payroll taxes.
- Transferable Ownership
In contrast to corporations, LLCs make it more difficult to change ownership. Unless there’s a shareholder agreement prohibiting the transfer of shares, shareholders of a corporation are free to transfer their holdings to anyone else. Adding new members to an LLC or changing the ownership percentages of current members typically requires the approval of all members unless the members agree differently.
Forming an LLC necessitates attention to a variety of laws and regulations. A lawyer can advise you on the best course of action and walk you through the legal procedure to assist you to choose the most suitable business structure for your needs.
Some business owners are drawn to LLCs because of the many benefits they provide. Choosing the right business structure at the outset is crucial; you can always make adjustments as needed, but it's better to get things rolling in the right direction.