Startup LLC: Everything You Need to Know
A startup LLC, or limited liability company, can be the ideal business structure for small business owners.3 min read
2. Easy Changes and Asset Protection
Why a Startup LLC Is a Good Idea
Among the various business types, you can choose from one of the following:
- Sole proprietorship
- S corporation
- C corporation
Many small startups choose the LLC business type because it helps them avoid the double taxation that corporations have to deal with. LLCs are taxed more like sole proprietorships, which can be useful if you're using a startup accelerator. If you decide you want to convert to a corporate structure later on, you can always do so. It's a fairly simple process if you find it necessary.
With an LLC, you can choose which state in which you'd like to form your new business. Delaware remains a popular choice due to its business-friendly reputation. The state tends to have low costs associated with operating a business, and the Court of Chancery judges are typically pro-business.
However, more states are adopting guidelines similar to Delaware if you prefer to form your LLC closer to home.
The cost of starting an LLC varies, depending on the state you form it in. It makes the most sense to start your LLC in your home state. For instance, some business owners in New York state believe they should form an LLC in Nevada or Delaware to avoid paying city and state business taxes in New York.
However, anyone operating in New York is subject to the state's tax guidelines, no matter what state they formed an LLC in. It usually winds up being more costly trying to avoid certain city and state taxes. Not only are you subject to city and state taxes where you live, but you also have to pay Nevada or Delaware (or other state) franchise fees and taxes just to form an LLC there.
Easy Changes and Asset Protection
Once your LLC is set up, you don't have to do a lot in terms of continual maintenance. It's also easy to sell interest in your company to someone else or add partners. Many people who create LLCs do so because this business type's most well-known benefit is the personal asset protection, since company assets are legally separate from personal ones.
LLCs are a more relaxed business structure than corporations, since C corps require minute-keeping for making board decisions. LLCs typically have fewer restrictions than other business types when it comes to administrative procedures.
After your LLC grows a bit, you may choose to change your business structure to an S corporation or C corporation, mainly because LLCs are limited in growth when it comes to mergers and acquisitions.
However, at the startup level, LLCs are often very adequate. This is because it's relatively simple and quick to form an LLC. Most people are able to create an LLC and register it with their state without help from an attorney. In many states, the cost to file LLC paperwork is low and can average around $100.
One of the most difficult steps of forming an LLC is choosing a name. If you have to change it later, this can be hard. Some business experts recommend selecting an LLC name that's short and abstract. You want customers to easily remember it.
After registering an LLC with the state, business owners need to obtain an Employer ID Number from the IRS. They'll then need to open a business bank account. After that, they're generally ready to open their business. LLC owners, who may act as their business's manager, can enter into contracts.
If you're not sure which business type is best for you, you can always consult with a legal professional to help you make a decision.
While LLCs offer a range of benefits, they may not remain the best business structure for you. Think about your short- and long-term goals when deciding which type of business to form.
If you need help with starting 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.