Forming a limited liability company is a popular choice for small business owners and entrepreneurs. limited liablity company provide liability protection and tax flexibility while avoiding much of the paperwork and formalities required of corporations. This beginner’s guide will explain what an Limited liablity company is, its advantages and disadvantages, and key steps for starting one.
What is an limited liability company Exactly?
An LLC is a business structure that combines aspects of partnerships and corporations. Like a corporation, an Limited liablity company protects its owners from personal liability so their personal assets are shielded from business debts and lawsuits. But similar to a partnership or sole proprietorship, profits and losses can pass through to the owners’ personal tax returns avoiding double taxation.
LLCs are recognized as separate legal entities from their owners. This means the business can open business bank accounts, own property, enter contracts, sue and be sued without affecting the owner’s personal assets. Owners (called members) enjoy liability protection much like shareholders in a corporation. However, an Limited liablity company offers more flexibility in management structure and ownership than a corporation.
What are the Benefits of an LLC?
Limited Personal Liability. As mentioned above, LLC owners are protected from personal liability for business debts and claims. Creditors usually can’t pursue an LLC owner’s house, car or personal bank accounts to settle business debts. However, limited liability protection is forfeited in cases of fraud or co-mingling personal and business funds.
Choice of Tax Treatment. LLCs are not directly taxed like a C-corporation. Instead, profits and losses pass-through to the owners’ personal tax returns. Limited liablity companies can file taxes as a sole proprietorship, partnership, S-corporation or C-corporation (if electing corporate tax status), providing more tax planning flexibility.
Less Paperwork & Maintenance. Forming an LLC is generally quicker and easier than starting a corporation which requires articles of incorporation, bylaws, directors/officers, stock issuance and annual meetings. Most states only require an articles of organization to start an LLC. Also, Limited liablity companies don’t require formal meetings, extensive corporate records, directors and officers like corporations.
Credibility & Professionalism. Forming an LLC establishes business credibility with customers and lenders. It shows commitment and professionalism over informal sole proprietorships. Using Limited liablity company in the business name alerts potential clients that the company is incorporated.
Steps for Starting an limited liability company
Follow these main steps to set up an LLC for your small business:
Choose a business name. Your LLC name must include an LLC identifier like “Limited Liability Company,” “LLC” or “L.L.C.” Your business name also can’t already be used by another LLC in your state.
File formation documents. To legally form your LLC, you must prepare and file “articles of organization” with your state. This document names the first members/managers, business purpose, office address and other basic details. Most states charge $50 to $500+ in fees.
Create an operating agreement. This document outlines the management, ownership structure, member responsibilities, voting rights, capital contributions, profit/loss distribution, buy-sell conditions and more. It’s an internal governing document.
Obtain licenses & permits. Most LLCs need to register for certain state and local licenses and permits related to their industry. Common examples include sales tax permits, food handler cards and professional licenses.
Set up accounting. You’ll need to track income and expenses, manage payroll, file taxes and produce financial statements. QuickBooks and Xero are popular small business accounting software options.
That covers the basics of what an Limited liablity company is and how to start one! Forming an Limited liablity company protects personal assets and allows business losses/profits to pass through to the owner’s tax return. Compare other structures like sole proprietorships and corporations to decide if an LLC is right for your business.