Why Should You Form a Limited Liability Company?
A Limited Liability Company is a formal business structure that is the simplest to form and maintain. It offers some of the same benefits of a corporation, without the costs and compliance complexity. Business owners who are looking for personal liability protection, tax flexibility, and management options may find that forming an LLC will be an ideal choice for their company.
Here are four advantages of this business structure:
- Simplicity – Next to operating a business as a sole proprietor or general partnership, the LLC structure is the least complex and costly form of business to start and maintain from a state compliance perspective. The business registration paperwork to form an LLC is minimal as are the ongoing filing requirements.
- Personal Liability Protection – Because an LLC is considered a separate legal entity from its members, its financial and legal responsibilities are also its own. So, if someone sues the business or the company cannot pay its debts, the LLC members are typically not held responsible. Therefore, their personal assets are at lower risk of being seized to pay legal damages or settle debt than they would be if the business were a sole proprietorship or partnership.
- Tax Treatment Options – By default, an LLC is considered a “disregarded entity” for tax purposes. As such, income tax is applied in the same way as it is to sole proprietorships and partnerships. Business income and losses passed through to its members’ tax returns and subject to members’ individual tax rates. An LLC has other tax treatment options, too. Members can opt for an LLC to be taxed as a corporation, with profits taxed at its corporate rate. Or members of an LLC can choose S Corporation election, which allows for the LLC to have pass-through taxation but with the corporate benefit of a reduced self-employment tax burden because members only pay Social Security and Medicare taxes on their income taken as salaries; members’ dividend income is not subject to self-employment taxes.
- Management Flexibility – An LLC may be either member managed or manager managed. In a member-managed LLC, the owners handle the day-to-day management of the business. In a manager-managed LLC, members appoint one or more managers to manage the company. In most states, an LLC can appoint members of the LLC to be managers, or it can hire someone else to do the job. The manager(s) of an LLC usually have the authority to make certain decisions and run the day-to-day operations of the company while members retain authority over more significant strategic matters. Most states consider an LLC to be member-managed unless the formation paperwork indicates it should be manager-managed.
How to Legally Form an LLC
- File Articles of Organization with the State – Forming an LLC requires filing Articles of Organization with the state in which the LLC will operate. CorpNet can register an LLC in all 50 states to enable them to save time and money—and to ensure their documents are submitted accurately.
- Obtain an EIN – An EIN (Employer Identification Number) is a nine-digit unique number (similar to a Social Security Number) that serves as a form of identification for a business. An LLC is required to have an EIN to open a bank account, file for permits and licenses, hire employees, and conduct other business activities. An LLC can obtain an EIN for free from the Internal Revenue Service. A business can also ask CorpNet to handle completing and submitting EIN paperwork on its behalf.
- Create an Operating Agreement – An LLC’s Operating Agreement defines the roles and responsibilities of its members and managers. Even in states that don’t require operating agreements, an LLC (especially one that has multiple members) might find one helpful for preventing misunderstandings about who should be doing what and who has the authority to make certain decisions.
- Obtain Business Licenses and Permits – An LLC may need to have various business licenses and permits to operate in the state or local area legally. Depending on the nature of the business an LLC will conduct, it may need federal licenses, too. Business owners should check with the local municipality, county, and state to see what requirements apply to them. CorpNet can also provide additional information about licenses and permits.
- Start a Business Bank Account – An LLC must keep its finances separate from its owners. Therefore, it’s essential to open a business bank account and use it only for the purposes of the LLC. LLCs that commingle personal and business funds risk “piercing the corporate veil,” (i.e., breaking down the separation between the LLC and its owners), which could result in the owners losing their personal liability protection.
How to Keep Your New LLC Compliant
An LLC must also pay attention to the ongoing compliance requirements it must fulfill to remain a legal entity in good standing with the state. Compliance obligations vary from one state to the next.
Some common examples of what many LLCs need to pay attention to include:
- Filing taxes
- Renewing licenses and permits
- Filing annual reports with the state
- Holding member meetings and taking meeting minutes
- Updating the state about significant changes in the business (e.g., change in address or adding a new member)
Is Forming an LLC Right for Your Business?
Choosing a business entity type for your company has both legal and financial implications. To make sure you choose wisely, consider consulting an attorney and accountant (or tax advisor) for information and guidance.
If you’ve decided that forming an LLC is right for your company, CorpNet is here to help you handle all of the filings to start your business and keep it compliant in any state!
Contact us to save you time and money and get the peace of mind that your filings will be completed accurately, on time, and affordably with a 100% guaranteed.
Learn More About Forming an LLC in Your Preferred State