Aspiring small business owners and entrepreneurs make scores of decisions in the start-up phase, such as where their products or services will sell, and what type of audience they’re targeting.
Deciding which type of business entity you’ll choose is one of the most important decisions you’ll make. Whether you incorporate, form a limited liability company (LLC) or choose to be a sole proprietor will have long-term effects on your business.
Here, we’ll explain LLCs and help you determine if forming an LLC is your best course of action.
What is an LLC (Limited Liability Company)?
A limited liability company is a type of legal structure that blends aspects of corporations and partnerships.
Like a corporation, an LLC is a legal entity separate from its owners (which are called “members”), and offers protection from liability – an advantage over traditional partnerships, where partners can be held liable for the actions of their other partners. LLCs also offer tax advantages, by eliminating the double-taxation paid on corporate profits.
Five FAQs About LLCs
What if my business direction changes after I form an LLC?
Each state has different regulations concerning LLCs. If you want to keep your LLC but change the type of business you do, check with the Secretary of State.
How do I file taxes as an LLC?
As far as federal taxes are concerned, LLCs are not separate tax entities. The business itself is not taxed on its profits; instead, members report all profits on their individual tax returns.
What if I move to another state?
LLCs have several options when moving to different states. You can:
- Continue the LLC in the first state and register in the new state as a foreign LLC.
- Liquidate the current LLC and form a new LLC in the new state.
- Transfer each member’s ownership from the old LLC to the new one.
- Form a new LLC and merge the previous LLC into it.
Some business issues require the expertise of an attorney, and this is one of them. If you move to another state after forming an LLC, consult your attorney to ensure you choose the right option.
What if I change my business name?
Notify the Secretary of State to change the business’s articles of incorporation. You may be able to do this online, and there is usually a fee. If the new name is already in use in your state by another corporation or partnership, you’ll need to choose a different name.
How do I pay myself in an LLC?
Consult your tax professional. You may be able to just write yourself a check from the business account.
Do Freelancers or Consultants Need an LLC?
Legally, freelancers and consultants do not need to incorporate or form an LLC. Many choose to remain sole proprietorships. However, there are good reasons to consider forming an LLC:
- First, LLCs protect you against liability, so that your personal assets are not at risk, in the event a client or employee sues the business. Conversely, sole proprietors are personally liable for all business losses and risks.
- Increased credibility is another advantage of forming an LLC. With “LLC” behind your company name, you may look more attractive to prospective customers, investors and employees.
- Finally, forming an LLC could be a benefit when it’s time to expand your business and raise capital. Sole proprietorship can apply only for personal loans, because this type of business is not a separate entity.
I’m Forming an LLC; Now What?
Now that you’ve made the decision that an LLC is the right business structure for you, you may be wondering how to form an LLC. Just follow these steps:
- Choose a home state for your LLC. If you’re going to be conducting business in only one state, then register in that state. Contact the state’s business registration department.
- Choose a business name. Check your state’s registry to see if the name is available or already in use by another company.
- File the Articles of Incorporation, which is required in all states. This form includes basic information, such as the business name, address, members and the registered agent (usually your attorney).
- Complete an LLC Operating Agreement, a very important document for LLCs with multiple members. The operating agreement spells out each member’s responsibilities, as well as how business decisions will be made. It also includes details on how profits will be distributed, and procedures for transferring or selling ownership interests.
- Obtain all necessary licenses and permits, and follow all other applicable procedures.
Why You Should Form an LLC
Forming an LLC offers limited liability, less recordkeeping than an S-Corporation and fewer restrictions on profit sharing – which are all distinct advantages for small business owners, entrepreneurs, freelancers and consultants.