Do I Need a LLC to Start a Business: Everything You Need to Know
An LLC, short for limited liability company, is a formal business structure providing personal liability protection to the owner.4 min read
Do I need an LLC to start a business? Once you understand what an LLC is, you can start to evaluate the pros and cons of forming one, along with the steps you need to take to get started.
What is an LLC?
Benefits of an LLC For Business
LLC's don't have any strict ownership restrictions. This means you have flexibility in regards to taxation and management, whether there's one owner or 100.
Forming an LLC does have a cost at the outset, but many find the hassle a small inconvenience with the ability to raise capital much higher in the long run compared to those in a partnership or sole proprietorship.
If you're the creator of the LLC, there's is no obligation to be involved with the day-to-day running of the company. There is endless flexibility in how you operate your business and work out your taxes; you could even run your company just like a partnership or corporation if you like.
If you don't like the idea of being involved in the big decisions of the company, you're able to employ someone who can make these decisions (like a CEO), so your company is functioning a lot like a corporation. There's no requirement for this potential employee to be a member of your LLC either.
In terms of how a company profits and losses for LLC members, there are a couple of great benefits. All members of an LLC can apply their portion of company profits and losses to their personal income tax return and members of an LLC are able to determine how any profits/and losses are divided. There is no weighted contribution correlated on contribution day to day.
Downsides of Choosing to Form Your Company as an LLC
If you start a business without an LLC, there are some risks. Even more so if you have partners and/or employees in the business. The costs of creating a formal entity can be significant if you have limited cash to start out with. If you're unsure of how the business will pan out, the ability to run as a partnership or sole proprietor means no annual reporting fees, meaning a longer runway for business to take off. You can always create an LLC at a later date if your company does grow.
FAQ About Forming An LLC When Starting Your Business
Is there much paperwork involved day to day?
Most states don't require any paperwork. Taking a few minutes during major business proceedings and creating standard operating procedures is a good idea to protect your LLC status.
What are the costs of set up?
Each year you'll need to pay annual fees and taxes that are applied by most states. California, for example, charges a fixed $800 LLC tax annually. And, if your business' total annual income exceeds $250,000 you'll have an annual fee from $900 to $11,760.
What are the alternatives to an LLC?
You could create an S-Corporation. As the owner, you qualify to be on the payroll. Otherwise, a sole proprietorship, partnership, or corporations are options. The option you choose can be based on your level of comfort and risk.
Do I need to provide details to anyone if I don't choose an LLC?
As a sole proprietor, you can give vendors and customers your social security number, but you are better off getting a tax ID, called an EIN, issued by the IRS.
Does my address become public when I create an LLC?
What Steps Are Involved In Forming An LLC
This is not a comprehensive list but will give you an idea of what's involved:
- You should draft an operating agreement for your LLC that spells out the details of the business arrangement, including members' percentage ownership, rights, and responsibilities.
- You need to create a written operating agreement that details the company's management, financial information and helps the members and managers of the business avoid disputes, and it protects the LLC's limited liability status.
- Consult with a tax professional to assist with your legal structure as you may benefit from tax advantages by forming an LLC or an S-Corporation.
- Check local laws, you may be required to get a business license.
If you need questions about forming an LLC you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb