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5 Things You Must Know Before Forming an LLC

Once you’ve got your business idea and know who you’re going to sell to, it’s time to set up your business structure. In this post from StartPack, learn the ins and outs of forming an LLC to help you determine if it's the right structure for your business.

Once you’ve got your business idea and know who you’re going to sell to, it’s time to set up your business structure. There are a few different options:

  • Sole proprietorship (this is where you are self-employed)
  • Partnership (similar to above, but more than one person has joint ownership of the company)
  • Limited Liability Company (LLC – you have less legal responsibility for your business)
  • Corporation (there are a few different types of corporation, but the business is a separate legal entity to you)

A Limited Liability Company (or LLC) is by far one of the most popular choices. Forming an LLC can provide you with many benefits as a business owner, but there are a few things that you need to consider. Here are 5 things you need to know before forming a Limited Liability Company.

1. Understand Exactly What an LLC Is

You’ve probably heard of or seen ‘LLC’ many times in your life, but are you clear on what an LLC is? An LLC is a hybrid structure in that it allows you to have the benefits of both partnerships and corporations.

The main features of an LLC are limited liability (as the name suggests) and pass-through taxation. By forming an LLC, you can protect your personal assets, as the owner, and can choose to report business revenue on your personal tax returns.

2. LLC Helps You Avoid Double Taxation While Keeping Your Assets Protected

As mentioned above, the most obvious benefit to forming a Limited Liability Company is… the limited liability. This protects your personal assets by ensuring liability only falls on the business entity itself, should there ever be any claims against your business. This liability protection is very similar to that of corporations, only without the high costs and intricacies.

An LLC also provides your business with tax benefits. With other business structures, you must undergo double taxation where income is first taxed at a corporate level and then taxed again at a personal level. Forming an LLC allows you to avoid this double taxation entirely and you can decide how you want your business income to be taxed. That’s a huge pro, especially for new businesses or someone looking to “upgrade” from a sole proprietorship.

3. You'll Be Seen as a Sole Proprietor for Tax Purposes

While we just covered that as being a good thing, it can be problematic. If you, the company owner, are the only member of your LLC, your business will be automatically seen as a sole trader/proprietorship when it comes to tax purposes.

That means you need to ensure there are other members within your LLC to reap the tax benefits. If you don’t work with anyone else, consider issuing a small number of shares to a friend or relative so that your business is seen to be a partnership. It should be noted, however, that this cannot be a spouse.

4. If You've Got Big Goals, Consider a Corporation

Forming an LLC is the best option for most, but there are a couple of exceptions that you should be aware of before making a final decision.

Firstly, if you think that you might “go public” with your business in the future (so shares can be bought and sold in the stock market), you will find that it is better to simply start as a corporation. Not only will you find changing from an LLC to a corporation later down the line a headache, but it is also likely to be a taxable occurrence that could otherwise have been avoided.

Secondly, if you expect to be provided with early capital from Venture Capitalist (VC) firms you will find that an LLC is an unsuitable structure as there are tax restrictions.

5. Forming an LLC is Relatively Easy

Although many business-related processes can seem overwhelming at first, forming an LLC is a relatively easy thing to do, especially when it is broken down. Here are the basic steps:

  1. You need to choose a name for your LLC, following the guidelines set out by the state your business is operating in. Simply make sure the name you want isn’t already taken and that you include Limited Liability Company, LLC, or L.L.C. in the name. It’s also best to check trademarks.
  2. Decide on a management style. You can have several owners, known as members, so you need to ensure that you all agree on how to manage the company. Typically, LLCs are either ‘member-managed’ or ‘manager-managed’.
  3. You need to file the articles of organization (initial statements) with your Secretary of State. It is best to get a business attorney to look at this document before submission to avoid any problems.
  4. Draw up the LLC Operating Agreement. This is the foundation for the structure of your LLC. This is the most complex part of forming an LLC, so it is advisable to hire an attorney to help you with this step.

Forming an LLC is the right choice for many small business owners, and it’s nearly always a good idea to mitigate financial risk, especially if you plan to borrow money. If you’re unsure about which structure will be best for you to save on taxes, book a consultation with a well-regarded accountant. They’ll be able to advise you on the best way to move forward.

And if you need any help forming your US LLC, setting up your US Bank Account, accessing US Payments, and managing ongoing compliance and tax filings, contact StartPack today!

About StartPack

StartPack provides company formation, tax and legal guidance, post-incorporation setup and bank account creation. Customers can launch a U.S. LLC from anywhere in the world.

Learn More: https://www.startpack.io/

About the author:

Arjun Mahadevan