As you think about starting your business, you should consider forming it within an LLC, or Limited Liability Company.
It’s one of the best ways to protect yourself against liability while still giving you a lot of flexibility with your company. There are advantages and disadvantages to starting your LLC.
1. It limits your personal liability. When you first start your business, the last thing on your mind is that your business might fail; however, it’s something you need to consider.
You need to be sure you are personally protected in case your business incurs any debts or is subject to lawsuits, etc. Starting a business can be an overwhelming proposition even without having to worry about whether or not you will wreck yourself financially.
2. Partnership vs. corporation vs sole proprietorship. Choosing to file an LLC for your business is the best of both worlds. Like a sole proprietorship or partnership, LLCs are pass-through entities for federal income tax purposes.
Basically, this means that the entities are not subject to income tax (unlike a corporation) and there’s less paperwork to be filed. And, LLCs enjoy the limited liability that you would get as a corporation.
If you form a partnership or sole proprietorship and incur any debts, it is your personal responsibility, along with your partners, to pay them off. With an LLC, you are not personally liable.
3. Flexible tax status. An LLC is taxed as a partnership or sole proprietorship but, you can elect for your LLC to be taxed as part of a C- or S- corporation if you choose.
4. Profit flexibility. The profits for each LLC member can be weighted differently from the ownership percentage in an LLC, unlike a corporation.
5. No Ownership restrictions. An LLC doesn’t have any citizenship or residency restrictions, so if you’re not a US citizen or want to start a business with someone who isn’t a US citizen, you are able to do so.
6. It’s more informal than a corporation. Corporations generally are required by law to have a minimum number of meetings per year with directors and shareholders, keep minutes of all of the meetings, all formal corporate resolutions, adopt bylaws, and more. As an LLC, you can keep track of all of those things but you aren’t legally required to do so which gives you more flexibility.
7. You can do it even if you are the only owner. Even if you are just a one-man or one-woman show, you can still form an LLC. It’s a great way to protect your personal assets and has many advantages over starting a sole proprietorship.
1. Cost. Forming an LLC does have some costs associated with it that vary from state to state. This will increase your start-up costs, which is hard when you already have so many expenses.
However, most people will tell you that it is well worth the cost, and there are a lot of options to help you get your paperwork in order.
2. Banking. Another cost that you may incur when forming an LLC is that of a business banking account. It’s important to keep your business separate from your personal finances. It’s not a good idea to just use your own personal bank account.
3. LLC termination. Generally, when one member departs an LLC, the LLC is required to be terminated and no longer exists in its original form. So, if you’re forming an LLC with others, that’s definitely something to think about. A new LLC would have to be formed in order for the business to continue as an LLC.
4. Self-employment taxes. Unfortunately, LLCs are usually subject to self-employment taxes. If you want to avoid that, you can choose to be taxed like a corporation.
LLCs are a great option if you’re starting a business but you’ll definitely want to consult an accountant and/or attorney to see what is best for you.