So you want to start a business, eh? Well, this is great! You are about to embark on an exciting journey. However, before you jump right in, there are a few things you should know. One of them is the decision whether or not to start your own LLC. When you are starting a small business and deciding on the level of protection you need for yourself and your business, the answer is often “a lot”. This article will show why setting up an LLC might be worthwhile for your new business.
What is an LLC?
A limited liability company is a form of entity that protects the personal property of its members. LLC offers more protection than a sole proprietorship or global partnership because it does not have one, but two levels of legal entities: one for the company and another for the natural persons who own the company.
LLCs protect both the personal property of owners and the business, making it much easier to recover from a lawsuit.
Why you should form an LLC
Incorporating a limited liability company can be an attractive option for the sole proprietor who wishes to limit personal liability or for owners of small businesses with multiple shareholders. Many guides suggest that you should start an LLC, however, it is important to understand all the legal and financial implications before making this decision. Integrating your small business may seem like the next logical step in its growth, but there are many factors that you need to consider before deciding on this form of protection.
Benefits of forming an LLC
- Limited liability – The LLC protects members from being held responsible for any liability that does not belong to them.
- Unique property security – In a sole proprietorship, if you die or are injured and cannot work, your business ceases to exist. When there is more than one owner in an LLC, this risk is eliminated.
- More tax advantages – You can write off more business expenses when you work as a sole proprietorship than if you were in an LLC. With an LLC, individual members are responsible for paying taxes on their share of “profits”, not just on the profits of the business.
- Distribution of interest – The LLC allows each member to be allocated a certain number of “shares” in the company or even percentages. This allows more flexibility than a sole proprietorship and better ensures equitable income sharing.
Disadvantages of forming an LLC
- Costs – Starting an LLC can be expensive. You will need to pay business fees, state filing fees, and paperwork fees.
- Management structure – In order to maintain the benefits of a limited liability company, you must have management structures in place that separate decision-making between the general partners and the managers who are responsible for managing the day-to-day operations.
- Financial needs – State requirements require that an annual report be filed with its corresponding state agency if you are an LLC.
When should you start your LLC?
Forming an LLC should only be done after you have explored other options and considered what is best for your business. You may want to train one if:
- You’re a SME boss with several shareholders or do not want to share the profits between the partners but rather prefer to sell shares in your company.
- You are a sole proprietor and wish to limit your personal liability.
- You are looking for more tax advantages than that of a sole proprietorship.
How much will it cost to form an LLC?
It is difficult to give a precise figure for the incorporation cost your small business as it will depend on several factors.
The state you live in, and whether or not there are local taxes that apply. For example, California charges an annual fee when filing its articles with the office of the secretary of state.
Questions You Should Ask Yourself Before Starting an LLC
- What is your goal with this business?
- What will the average profit be per year, and how much do you want to reinvest in the business?
- How important should your personal income be before forming a sole proprietorship or LLC becomes more beneficial than just being a person working for yourself?
- What’s your timeline?
- Would you like to take on more personal responsibilities in the future, or would you rather just focus on managing day-to-day operations when necessary?
The decision to form an LLC should only be made after you have explored the options and considered what is best for your business. If you want to limit your personal liability, seek more tax benefits than a sole proprietorship, or just need help managing day-to-day operations when needed, then setting up an LLC may be worth it. !