What’s all the hype about LLC’s? Why should you register your business as an LLC? Well, there’s actually a lot to gain by designating your company as an LLC. Here, we provide all of the information you need to understand what the benefits of an LLC are and how forming an LLC can help your business succeed.
What is an LLC?
‘What is an LLC company?’ is what you’re likely wondering if you’re reading this section. Well, in simple English, a limited liability company (LLC) is a cross between a sole-proprietorship and a corporation. We won’t leave it at that though, because there’s a lot more to it.
First of all, there are a variety of business structures, an LLC is just one of them.
A few examples of other business structures would be:
- Sole proprietorship – an individual or a married couple runs a business alone.
- General partnership – two or more individuals who agree to share the profits, losses, debt, and management of a business. Generally speaking, the partners also agree to contribute money, labor, and/or skill to the enterprise.
- Corporation – a very large firm that is legally recognized as an individual itself. The corporation is owned by shareholders, and the liability of owners is limited by virtue of the fact that the company itself is responsible for any rights or wrongs committed in its name.
Beyond the general structure differences, a sole-proprietorship or a partnership must also follow a different set of rules and regulations than a corporation does. The owners of those two simpler forms of businesses only need to pay taxes as individuals; they are not taxed twice (once on profits + once on their individual returns) the way the owners of corporations are.
But that doesn’t necessarily mean lower taxes, so be sure to consult with a legal advisor to gain a better understanding of how your taxes would look as an LLC. And while it’s not necessary to hire a lawyer if you’re looking at forming an LLC, it’s always a good idea to have someone who knows how to form an LLC take a look over your paperwork.
If you’re concerned about the cost of hiring a lawyer or legal consultant, fear not! You can explore options for obtaining business loans through a financial-technology company. Lending Express can help you with the business funding you’re looking for.
Benefits of an LLC
Okay, so now that you know what an LLC isn’t, it’s time to answer that looming question: what is an LLC business?
An LLC basically keeps the tax structure of sole proprietorships and general partnerships and combines that with the limited liability provided to corporate owners. What that means is, if your company is sued, you as an individual would not be held responsible. Rather, the business itself is answerable to any wrongs (or rights) that are done in its name.
But what are those big benefits of an LLC that make it worthwhile for a business owner to pursue?
Here are the top benefits of an LLC:
- Less paperwork to fill out compared to corporations; this makes it easier to form an LLC and to maintain it as well
- More flexible tax options to pick from than sole-proprietorships, partnerships, and corporations; this can also make certain tax write-offs available
- Limited liability, to protect the business owner from legal action taken against the company; this also means that your personal assets are not at risk if the business is in debt
We do understand that forming an LLC is not the right decision for every business. With benefits, there are also drawbacks.
Here are a few disadvantages of an LLC:
- Less clear definition of roles which can cause some confusion within the company, and also to potential investors; an LLC Operating Agreement can be a solution to this issue (more on that below)
- More risk of being dissolved in the event that a partner in the LLC either deceases or leaves the company; again, an LLC Operating Agreement can help avoid this issue
- Self-employment taxes that LLC owners must pay; as mentioned above, this can sometimes mean paying higher taxes than corporations
So now that you’ve got a better idea of the ups-and-downs, it’s about time we explain how to form an LLC.
How to form a limited liability company (LLC)
The process will vary between states (we’ll discuss that in detail below), but typically a new limited liability company will be asked to:
- Pick a name for the LLC
- Choose a registered agent who will receive legal documents on behalf of the LLC
- Draw up an LLC Operating Agreement which serves as a blueprint for how your business will run; it defines members’ roles, responsibilities, and rights within the organization; it also describes what happens if the company goes out of business, if someone leaves the company, etc. (this is not required by law, but is recommended)
- Fill out forms which require basic information such as members names, addresses, etc.
- Pay a filing fee usually no more than a few hundred dollars (and a yearly fee/tax in select states, to maintain the LLC registration)
- Get certified so that all other steps (opening a business bank account, obtaining a business license, etc.) can be completed, and the LLC can start operating
Not such a tough process, especially considering the potential benefits of an LLC. As noted above, it’s recommended that you consult with a legal expert who can guide you through the finer details. By now though, you should have some basis to answer the question What is a limited liability company?
Forming an LLC: State by State guide
When it comes to describing how to form an LLC, there are differences in the costs and process in different states. There are a ton of resources available to do some more in-depth research on the specific state you plan on starting your LLC in.
Here we’ll provide you with a glimpse at the top-three and bottom-three states for opening an LLC, and provide tax statistics to explain why they rank that way.
Top-three states to open an LLC:
- Wyoming – 0% corporate tax; 0% individual income tax; 4% sales tax
- Alaska – 9.4% corporate tax; 0% individual income tax; 0% sales tax
- South Dakota – 0% corporate tax; 0% individual income tax; 4.5% sales tax
Bottom-three states to open an LLC:
- New Jersey – 6.5%-9% corporate tax; 3.5%-10.75% individual income tax; 6.63% sales tax
- California – 8.84% corporate tax; up to 13.3% individual income tax; 7.25% sales tax
- New York – 6.5% corporate tax; 4%-8.82% individual income tax; 4% sales tax, add 8.875% use tax within NYC
Other states that have especially favorable rules and regulations for LLCs include:
- Delaware – with a special business court handling commercial law for over 200 years, Delaware is home to more than 60% of Fortune 500 companies. Businesses can register their LLC in Delaware without needing to actually reside there, and in fact, there’s no corporate income tax in the state for ‘foreign’ LLCs that don’t do any business within Delaware.
- Nevada – similarly to Wyoming, Nevada has 0% corporate tax and 0% individual income tax. Additionally, there’s no franchise tax and Nevada doesn’t share information with the IRS (what happens in Vegas…).
Get your LLC started
Be sure to consult with the Secretary of State’s office in the state you wish to form an LLC in order to get all the information you need. And as we mentioned a couple of times already, consulting with a lawyer about forming an LLC is a good way to get yourself prepared for the exciting road ahead.
Take what you’ve learned here and start your LLC on the right foot. Go ahead and let us know if you found this guide helpful in the comment section below!