Why Form an LLC: Everything You Need to Know
Why form an LLC? An LLC, or a limited liability company, operates essentially as a corporation, sole proprietorship, and partnership all in one.5 min read
2. Advantages of Forming an LLC
3. Difference Between an LLC and a Partnership
4. Difference Between an LLC and a Corporation
5. How to Set Up an LLC
Why Form an LLC: Everything You Need to Know
Why form an LLC? An LLC, or a limited liability company, provides that its members and managers can never be held personally liable for the financial losses of the business. An LLC is a sole legal entity; and the name you choose for your LLC is the legal name of your company. This means that the name of your company is the name you will use when conducting business.
The legal name of an LLC lasts until the business is dissolved. Once an LLC is in existence, the owner has the option of also filing a DBA to conduct business under a name different than the registered LLC business name. The members of an LLC can choose whether they want to be taxed as a sole proprietorship, corporation, or partnership. LLC members owe Social Security and Medicare taxes, but such taxes can be paid through the members’ self-employment tax form.
Advantages of Forming an LLC
- Operating an LLC can help you gain credibility with potential customers, vendors, partners, and employees.
- An LLC offers protection against personal liability, including personal assets; therefore, an LLC is the preferred business type when liability is an issue, i.e. when the company hires employees.
- Owners will not be personally liable for decisions or actions taken by the LLC.
- When your company expands, seeking funding is a much more straightforward process.
Difference Between an LLC and a Partnership
A partnership is an entity formed when at least two or more individuals agree to go into business with one another. More specifically, there are two main types of partnership structures, which include general partnerships and limited liability partnerships, also referred to as limited partnerships. There are no filing fees associated with establishing a partnership nor are partnerships required to hold meetings, prepare meeting minutes, appoint officers, or issue shares of stock as with the formation of an LLC. Keep in mind, however, that unlike with an LLC, creditors can initiate legal proceedings against the partnership itself, including the assets of the partners, i.e. house or automobile.
Difference Between an LLC and a Corporation
A corporation is a legal entity operating under the state laws in which the business is incorporated. A corporation is treated as a person for all intents and purposes. Therefore, a corporation can sue and be sued, buy or sell real estate, and even break the law, which is much different than the treatment of an LLC. There are generally two types of corporations—S corporations and C corporations. S corporations are pass-through tax entities whereas C corporations are completely separate entities from its owners. A significant distinction between C corporations and businesses that operate as pass-through entities is that owners of C corporations are taxed only on income received. Since a corporation is taxable, the profits leftover after being incurring corporate taxes are not taxed to the owners. Such profits are only taxed when distributions are paid to shareholders in the form of dividends. However, this would be the case for unincorporated businesses and S corporations.
Some benefits to forming a corporation include:
- A business that is incorporated can file lawsuits and buy/sell property.
- Incorporation even means that the company can commit a crime, i.e. tax fraud or another type of business crime.
- Incorporating is simple. Simply file an application within the specific state.
- All 50 states, including the District of Columbia, recognize both LLCs and corporations.
- A corporation can evade double taxation of the profits and dividends by choosing Subchapter S tax status.
- Corporations can deduct normal business expenses before they apportioning income to owners.
- Corporations can easily transfer ownership through a transfer of securities to the new owner.
- Corporations can operate for an unlimited period of time.
- Corporations can create tax benefits but C corporations might be exposed to double taxation of profits.
- Those businesses set up as S corporations can pass through income to the shareholders.
- The IRS generally taxes corporations at a reduced tax rate than individuals.
- Corporations can issue shares of stock.
- A business that is incorporated can take its company public.
How to Set Up an LLC
LLCs are formed under state laws - which vary state by state - when an individual files the Articles of Organization with the Secretary of State’s office in the state you choose to register. A name availability check can be conducted on the Secretary of State’s website in order to ensure that the name is not currently being used. An LLC business owner is required to report any changes in address, membership, or service and must also file an annual report that includes important business and financial information. The legal name of an LLC lasts until the business is dissolved. When broken down step by step, the following actions must be taken when forming an LLC. Keep in mind, however, that some minor adjustments may be made depending on the state in which you are forming your LLC.
Step 1. Pick a name for your LLC. Remember that certain guidelines are in place when choosing your LLC name. First and foremost, you’ll want to ensure that no one else has taken the name you wish to use. You’ll want to run a search on the State’s Secretary of State website to be sure that it is not already being used. There are also several other requirements when choosing a name for your LLC, which include the following:
- The name of your LLC must include either LLC or Limited Liability Company after the name of your LLC; this allows everyone to know and understand that your business operates as an LLC.
- Your LLC cannot include certain punctuation marks, i.e. exclamation points, question marks, etc.
- Understandably, your LLC name cannot include certain terms, including but not limited to “University,” “College,” and other similar terms. Also of identical importance is the fact that you cannot include the terms lawyer or doctor unless you are in fact a lawyer or doctor utilizing the LLC to practice law or medicine.
Step 2. Choose a registered agent. This is a general requirement in all states. The registered agent will be the individual or company that accepts legal service in the event that you are sued. In addition, the registered agent will receive all legal paperwork pertaining to such a legal proceeding.
Step 3. File the Certificate of Organization. There will be a nominal fees associated with filing this certificate. Be sure to check your state’s government website to find out how much the fee will be. When you file this document, you’ll need to include your company name, registered agent contact details, and number of shares that are being issued, if any.
Step 4. Create an operating agreement. Note that this document is not required in all states; therefore, you’ll want to check the specific state’s Secretary of States website to find out if you are required to file an operating agreement.
Step 5. Obtain your EIN. This is always a requirement, particularly for tax purposes. You’ll need this to conduct business, open a business bank account, business credit cards, and the like. Additionally, if you want to hire employees to work for your LLC, you will need this EIN number. It is a very simple process to obtain, as you can simply visit the IRS website to obtain.
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