Every small business starts really small—just you and your idea and a will to make a mark. Even years later, your business may remain a solo venture. You wear all the hats and don’t think of yourself as a company. But forming an LLC, a limited liability company, may benefit you. This article explains what an LLC is and weighs the pros and cons of setting up as an LLC.
What is an LLC? An LLC is a business structure you establish primarily for tax and legal purposes. To set up an LLC, you’ll need to:
- Choose a business name.
- Create and file articles of organization with your state.
- Appoint a registered agent.
- Pay required fees.
- Publish a notice of intent to create an LLC (only in some states).
- Create an LLC operating agreement, spelling out the rights and responsibilities of each LLC owner.
There are several types of business entities you can consider from a business tax perspective. This article covers the main ones. Deciding between setting your small business up as an LLC or a corporation? This article can help.
Nevertheless, our focus here is on LLCs and the pros and cons of this approach for a small business. Let’s discuss the benefits first.
Advantages of Forming an LLC
Well, the first advantage is right there in the name—“limited liability.” By setting up an LLC, you can limit liability for employee actions (negligence or misdeeds) or associated with business debts.
The LLC approach also offers greater flexibility than some of the other options available to a small business. First, there is no limit on the number of members you can have in an LLC. Further, the members can be individuals, partnerships, trusts, or corporations. Additionally, you don’t have to create a board of directors. An LLC can be managed by members, though you can elect a management group if you wish to do so.
If you need to buy property or equipment, the LLC applies for the financing rather than you, individually. As long as you don’t personally guarantee the debts, you would protect yourself from personal responsibility for the LLC’s mortgage or other financial debts.
Establishing an LLC also reserves your business name. Another entity can’t come along and register its business with the same moniker. While reserving your name, get a domain name too. It can help with locking down your name for the long term.
Having an LLC after your business name can also add credibility. Anyone visiting your business website would be able to see you’ve taken the time to register your business. It helps establish that you are a responsible business owner. If you’re hoping to attract investment, you may need an LLC to make your appeal.
Why an LLC May Not Be Best For You
Setting up an LLC can be a hassle. In the United States, the LLC needs to be legally separate from the individual owner. This means you’ll have to establish a bank account for the LLC and keep books as the LLC. If you don’t respect the boundaries between you and the LLC, you could still end up liable for something that would otherwise have been the LLC’s responsibility.
You may have to pay a state fee to form your LLC. The average national cost to form an LLC is $500 per Startupnation. Check with your local Secretary of State to learn the application requirements in your area. In fact, you can choose where you form your LLC. Delaware is a common choice because it is widely known to be pro-business.
Depending on your state, you may also be required to hold an annual LLC meeting. Of course, this can just be taking yourself out to lunch, but it is one more thing you have to keep up with by having an LLC.
As far as taxes, there’s really no difference between being a single-member LLC or a sole proprietorship. You’ll still declare your business financials on a Schedule C with your annual 1040. That means you’ll still incur “pass-through” taxation in which the profits and losses impact your individual tax return.
Again, depending on your state, you may also need to pay a capital values or franchise tax for having an LLC.
Finally, transferring ownership of an LLC can be more difficult than some of the other options available to the small business owner.
Consult With a Business Professional
Many startups go the LLC route because it is a fast and simple way to go. But if you’re not planning to add employees or offer shares, it may be overkill. Choosing the right approach for your business is easier with a professional’s help. You might consult with a tax professional or business attorney to answer your questions and determine the best approach for your small business. Or get started with Business Maker to build your business on a solid footing.