An LLC, or Limited Liability Company, is a business organization setup that minimizes liability and provides the benefits of a corporation. Due to the flexibility and exemptions it provides, many small and medium-sized companies are converting their organization into an LLC setup. Every country and state recognize LLCs as legal business entities and make the process of setting one up easier. If you are planning to open a business but unable to decide the type of set up, an LLC can be an ideal choice. Along with several advantages, setting up an LLC comes with a few disadvantages too, which is why you must learn more about it to make an informed decision. Here is what you should know about an LLC before setting one up.
Since these three are often confused with each other, let’s make it clear. Even though an LLC is considered to be a mix of a partnership and a corporation business setup, it has its own perks. As mentioned, an LLC is a self-sustaining organization that is identified as a single entity. Typically, an LLC is divided into two types - single-owner or single-member and multi-member.
On the other hand, a partnership business setup involves two to three founding members with equal claims (in most scenarios). A corporation is also formed by shareholders but does not get the same benefits as an LLC. However, every type of entity has its own benefits.
Setting up an LLC requires you to fill up a form, file necessary paperwork, hire a registered agent living in the same state, and pay a filing fee. Learn more about the requirements of opening an LLC in your state and country as the rules differ from place to place. The filing fee structure and reporting requirements also vary in every state. For example, if you are located around Michigan, you should definitely do a Michigan business entity search before filing your own paperwork so that you can see what are the best practices in your town.
A ‘certificate of organization’ or ‘certificate of formation’ should be filled by the LLC head that conveys the organization’s name, address, registered agent, number of members with names, the purpose of starting the organization, and dissolution date. The manager needs to sign the form, submit the paperwork and certificate, and pay a filing fee to complete the procedure of forming the LLC.
There are several advantages to setting up an LLC and below we'll outline what you need to know about an LLC.
One of the main (and often only) reasons to form an LLC is benefiting from liability protection that other business structures are often exposed to. You not only need to pay fewer taxes but are also exposed to less paperwork. Depending on the state you live in, you will need to fill an operating agreement, which, although, is not mandatory for every state.
Since LLCs have been around for a while, you can get plenty of advice from experts and experienced entrepreneurs. As mentioned in the Swyft Filings review, hiring a business formation service provider will help new business owners set up their LLC and run it on a shoestring budget. They will also help find loopholes that can save you from committing grave mistakes.
One of the other keys to know about an LLC is that owners benefit from several tax exemptions and clauses. For instance, the IRS lets LLCs choose the type of taxation pattern preferable for the organization. They can either choose to pay taxes as a partnership entity or as a corporation.
Apart from gaining tax and liability benefits, LLCs also gain operational flexibility, which makes handling business much easier. You are obliged to fulfill minimum annual requirements as compared to other organizations and ownership stake can be freely distributed.
Consider these disadvantages when considering an LLC.
Raising investment capital to build an LLC is not an easy task. Even though it majorly depends on the type of business you are dealing with, most LLCs generally face difficulty with capital raises. This is mainly because angel investors and companies prefer to invest in C-corporations that offer stock buyouts. With this, the investors are exempted from paying taxes for a long time.
Even though setting up an LLC requires you to fill in less paperwork as compared to other organization types, you must pay an annual fee and maintain your own records. Some states also require LLCs to have their own records to distinguish them from personal business. You should also open a separate bank account.
Unlike corporations, LLCs don’t need separate roles like CEOs, managers, directors, etc. While this can give enough operation flexibility to LLCs, it can be a disadvantage too. Every person working in an LLC will be dumped with several responsibilities at once, which can create confusion. Unless the members of the LLC have clearly defined the roles and responsibilities of the people involved, the operation is no less than a conundrum.
These pointers will help you make an informed decision and protect you from plausible financial losses. Since starting an LLC has both advantages and disadvantages, consider every aspect before you make a decision. When compared to a corporation and a sole proprietorship, from what you now know about an LLC, it can offer real benefits.