Should My Business Be an LLC: Everything You Need to Know
Should my business be an LLC? An LLC, or limited liability company, is a business entity that can give you and your company many different advantages.3 min read
Setting Up an LLC
- Choose a business name. Your LLC should have a unique business name that isn't already registered in your state. It should also end with the words “LLC” or “Limited Liability Company."
- Create and file an Articles of Organization. While the name of the document and number of required signatures vary by state, it simply states basic information about your LLC.
- Appoint a Registered Agent. This is an individual, usually an LLC member, who will play an important role as the handler of all legal documents for the business.
- Payment of Required Fees. Check with your LLC's state to see what fees need to be paid.
- Publish a Notice of Intent. Depending on the state, you may need to let the public know that you'll be forming an LLC by placing several announcements in the local newspaper for some time before forming the business.
- Create an Operating Agreement. This may not be required by your state, but it's recommended that you draft this document to avoid any conflicts among members. It states the privileges and obligations of all the members in the LLC.
How Can an LLC Benefit Your Small Business?
The most appealing benefits of an LLC are limited liability for your personal assets, the IRS requiring members to file individual tax returns, and freedom to manage and operate the business as you'd like.
Should Your Business Be an LLC or an S Corp?
While both entities can give you similar benefits, you should consider their differences.
Advantages of Forming an LLC
- Easy setup. LLCs with one member only need to fill out a one-page form.
- Inexpensive. Setup should only cost a couple hundred dollars.
- Guidelines. There aren't many rules to forming an LLC, unlike an S Corp.
- Simple structure. An LLC is like a general partnership with the addition of limited liability.
- Tax advantages. Besides “pass-through” treatment and expense deductions, you won't have to pay unemployment insurance taxes.
Disadvantages of Forming an LLC
- Additional taxes. If your LLC has only you as a member, you'll have to pay self-employment taxes on any income that comes from the IRS.
- Need for separation. Keeping your business professional can be more difficult with a single-member LLC. You should be careful to separate your personal life from anything involving the business to avoid problems.
Advantages of Forming an S Corp
- Extra income. An S Corp gives you benefits from its excess profits.
- More recognition. S Corps are widely recognized in the country, while LLCs, being a newer type of business entity, may be more restricted in certain states.
- Fringe benefit options. You may be able to get certain medical plans, retirement plans, and employee stock purchase plans.
Disadvantages of Forming an S Corp
- Strict guidelines. To form an S Corp, you must be a U.S. citizen or resident and have 100 shareholders or fewer.
- Expensive. Additional taxes and fees may apply.
- Strict requirements. All shareholders need to follow the requirements, or they must face the consequences.
- Passive income limits. Certain activities, like real estate investments, cannot add up to more than 25 percent of the gross.
- Reasonable salary. The IRS has been very critical of shareholders paying themselves more than what's reasonable.
Similarities Between an LLC and an S Corp
An LLC and an S Corp both offer limited liability and pass-through taxation, and they both may be required to file annual reports and pay additional fees.
Differences Between an LLC and an S Corp
LLCs allow members to be an individual or company, avoid certain business formalities, and retain the power to vote on percentage transfers. However, an S Corp cannot be owned by another business, must follow formalities, and allows shareholders to transfer their stock to another owner freely.
Reasons Why a Small Business Should Incorporate
By forming an LLC or corporation, you'll be given the chance to conduct business with vendors, consumers, and partners more often than if you weren't a state-registered entity. You'll also be able to change who owns or manages the business without fear of the entity ending.
If you need help with deciding whether your business should be an LLC, you can post your job 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.