“Should I start an LLC?”
It’s one of the most common questions asked among entrepreneurs and small business owners. And the answer varies based on your personal and professional goals.
If you want an inexpensive way to establish your business and gain credibility, protect your personal assets, and grow your business, then an LLC may be the right choice for you.
Keep reading as we dive into the purpose of forming an LLC, whether an LLC is really necessary, and what must be filed to form an LLC.
What is an LLC?
A limited liability company, or LLC, is a hybrid business structure that provides the personal liability protection of a corporation and the pass-through taxation of a partnership.
Like corporations, an LLC is considered a separate entity and can have its own unique EIN (employer identification number) and bank account to conduct business. Unlike corporations, LLCs are easier to form, simpler to maintain, and offer a flexible management structure where the business can be owned by one or more members.
This allows for LLCs to operate as one of the following:
Single member LLC: Where you only have one member running the company.
Member managed LLC: All members are treated as equals and share the same amount of responsibilities.
Manager managed LLC: A board of managers is elected to oversee the direction and operation of the business.
An LLC business structure is one of the simplest ways for owners to protect their personal assets while being able to enjoy other benefits that will help the business grow and thrive.
Reasons to form an LLC
Just this year, the percentage of people with side hustles more than doubled. In an economy where side hustles and freelancing is common, understanding the benefits of an LLC business structure is extremely important.
As a sole proprietor, you have no separation between your personal assets and business assets. This means if your business is sued, your home, personal property, retirement accounts, and more are at risk.
Here are just a few reasons to form an LLC:
Limited liability protection – protect your personal assets from lawsuits and creditors.
Simplicity – LLCs are easy to form and maintain as there are no formal management roles, no annual meetings, and very little paperwork.
Flexibility – LLCs can operate as a single-member or multi-member entity. Plus, there are various tax options as well.
Pass-through taxation – An LLCs profits are only taxed once because they go directly to the owner(s), who report this on their personal tax returns. This process is known as pass-through taxation and avoids double taxation that corporations have.
Increased credibility – As a formal business structure, and one of the most popular entities to form, an LLC shows business partners, employees, and customers that you’re an established and credible business.
Access to business loans and credit – As a separate business entity, you’re entitled to several financing opportunities.
How to form an LLC
Although the process of forming an LLC may vary from state to state, there are generally six easy steps you can follow.
Select Your State – Each state offers detailed instructions on how to form an LLC in that state. Typically, business owners will form an LLC in the state in which they live, and the business operates.
Choose a Business Name – A requirement for all states is that an LLC is given a unique name from other businesses within that state.
Assign a Registered Agent – A registered agent for your LLC is the personal designated to accept all legal notices and documents on the business’s behalf.
File the Articles of Organization – The Articles of Organization is the birth certificate to your business. It’s the document that officially registered your LLC with the state. Included in the Articles are very important pieces of business information, for example, the name of your registered agent.
Create an Operating Agreement – An Operating Agreement for your LLC is the legal document that outlines the details of your business. For instance, the members' names and their responsibilities.
Obtain an EIN – As a separate business entity, LLCs can obtain an EIN through the IRS – this is sometimes not a requirement but often done for tax purposes.
Once these steps are complete and these documents are properly filled out, it’s time to submit your application for review. The process of forming an LLC often takes seven to ten business days but can vary by state and take up to two to six weeks.
Who Should Start an LLC?
An LLC structure is recommended for anyone who wants to separate themselves and their personal assets from the business. If you’re a freelancer, entrepreneur, or small business owner, LLCs offer the perfect combination of simplicity and personal liability protection.
Additionally, if you own a business with employees or multiple partners, an LLC business structure also protects you from their actions.
If you’re a start-up business searching for traditional funding options, then an LLC structure may not be the best fit for your situation. This means that if your business is looking for investors, an LLC is often viewed as a risky option and will not be considered.
Work With a Business Attorney
An LLC provides a stable structure for your business operations. This includes making informed decisions, dividing profits and losses, taxes, and management structure.
Do you need a business attorney to form an LLC?
It’s not a requirement, but unless you’re skilled in business law, it would be a mistake if you didn’t choose to work with an attorney. Working with an experienced attorney ensures that you prepare and file all documents with the Secretary of State correctly. Attorneys can help draft documents such as the Articles of Organization and Operating Agreement, as well as any other required or necessary forms.
Business attorneys also know how to advise on the various options that are not only available, but best for your business. They can explain the advantages and disadvantages of forming an LLC and how it pertains to your unique situation.