So you want to start a business, huh? Well, that’s great! You’re about to embark on an exciting journey. However, before you jump right into it, there are some things you should know. One of these is the decision of whether or not to form your own LLC. When starting a small business and deciding how much liability protection you need for yourself and your company, oftentimes the answer is “a lot.” This post will show why forming an LLC could be worth it for your new business.
What Is An LLC?
A limited liability company is a form of entity that protects the personal assets of its members. The LLC provides more protection than an individual proprietorship or general partnership because it has not just one, but two levels of legal entities: one for the business and another for individuals with ownership of the company.
LLCs protect both the owners’ personal assets and the company’s, making it much easier to recover from a lawsuit.
Why You Should Form An LLC
The incorporation of a limited liability company can be an attractive option for the sole proprietor who wishes to limit their personal liability or for small business owners with multiple shareholders. Many guides suggest that you should start an LLC, however, it is important to understand all of the legal and financial implications before making this decision. Incorporating your small business may seem like the logical next step in its growth, but there are many factors that you need to take into account before deciding on this form of protection.
Advantages Of Forming An LLC
- Limited Liability – The LLC protects the members from being held responsible for any liabilities that are not their own.
- Sole Ownership Security – In a sole proprietorship, if you die or become injured and can’t work, your business ceases to exist. When there is more than one owner in an LLC, this risk is eliminated.
- More Tax Benefits – You can write off more business expenses when operating as a sole proprietorship than if you were in an LLC. With an LLC, the individual members are responsible for paying taxes on their share of “profits,” not just company profits.
- Allocation Of Interests – The LLC allows for each member to be assigned a certain number of “shares” in the company or even percentages. This allows for more flexibility than a sole proprietorship and better ensures an equitable split of earnings.
Disadvantages Of Forming An LLC
- Expense – Starting an LLC can be expensive. You will need to pay for professional fees, state filing fees, and paperwork costs.
- Management Structure – In order to maintain the benefits of a limited liability company, you must have management structures in place that segregate decision-making between general partners and managers who are responsible for running day-to-day operations.
- Financial Requirements – State requirements mandate that an annual report be filed with its corresponding state agency if you are an LLC.
When Should You Form Your LLC?
Forming an LLC should only be done after you have explored the other options and considered what is best for your business. You may want to form one if:
- You are a small business owner with multiple shareholders or do not want to divide profits among partners but instead prefer to sell shares in your company.
- You are a sole proprietor and want to limit your personal liability.
- You are seeking more tax benefits than that of an individual proprietorship.
How Much Will It Cost To Form An LLC?
It is difficult to give a specific figure for the cost of incorporating your small business because it will depend on several factors.
The state in which you live, and whether or not there are any local taxes that apply. For example, California charges an annual fee when filing its Articles of Organization with the Secretary of State’s office.
Questions You Should Ask Yourself Before Starting An LLC
- What is your goal with this business?
- What will be the average profit per year, and how much of that do you want to reinvest in the company?
- How large does your personal income need to be before incorporating a single proprietorship or LLC becomes more beneficial than just being an individual person working for yourself?
- What is your timeline?
- Do you want to take on more personal responsibility in the future, or instead just focus on running day-to-day operations when necessary?
The decision to form an LLC should only be made after you have explored the options and considered what is best for your business. If you want to limit your personal liability, are seeking more tax benefits than that of a sole proprietorship, or just need help running day-to-day operations when necessary, then forming an LLC may be worth it!