In recent years, the business terrain has experienced significant changes. A lot of policies have changed regarding how one should start a business. What it takes to start a company today is different from how it was 20 years ago. Additionally, this also means it will change in the future. As an entrepreneur, you will face vital decisions, including the type of business structure to use in your company setup. Many countries allow the typical structures of a corporation, business ownership, sole-proprietorship, and partnership. In places like the USA, the government allows Americans to form a limited liability company. Below, we dig deeper to help you understand everything you need to know about LLC (Limited Liability Companies).
1. Let’s Start Here: What is a Limited Liability Company (LLC)?
An LLC is a type of business ownership that combines various features of partnership and corporation structures. However, it would help if you did not mistake an LLC as solely a partnership or a corporation. Based on a review posted at IncFile Review, an LLC is a hybrid business structure. Additionally, this type of business structure offers members flexibility in running their businesses while protecting them from personal liability. The requirements to set up an LLC vary, so it would be best to familiarize yourself with the regulations set by your state. This helps to ensure strict compliance and that you’re not breaching any law. In places like Texas, forming an LLC is simple since the state offers a platform to complete your application online.
2. Ownership
In a Limited Liability Company, the owners are called members and not shareholders or partners. As we mentioned above, an LLC setup offers its members personal liability, which means members receive limited protection from the business’s debts and actions. Members can be sole individuals or include any corporation, trust, partnership, partnership, or other legal, commercial entities. Their internal members can manage LLCs. Additionally, they can also be managed externally with the help of outside management. The latter allows for a more flexible management option, which is better compared to other business structures.
3. Taxation
Limited Liability Companies are taxed the same as sole proprietorships if there’s one owner. Additionally, they’re also taxed as partnerships if there are many owners involved. You will need to report taxes on your personal return instead of doing a separate filing. LLCs are also considered pass-through entities for taxation purposes. This means that you pay taxes on your business’s profit and not a corporate tax on the business entity. The significant precedence with LLCs is they are flexible in how they can be organized for tax purposes. A good example is how an LLC can be taxed as an S Corp or as a C Corp. If your business is growing continuously, you can choose a different taxing structure other than the standard.
4. Benefits of an LLC
The main advantage is that it protects its members’ assets if the business faces any legal hurdle; this is if your business is hit with a lawsuit. In other words, this means the company is protected from any ruling or judgment imposed on the business. If the business can’t bear the judgment’s expense, you, as the owner, will not be forced to cover the costs from your personal finances. Flexibility is another critical benefit of LLCs. An LLC can be internally managed. This means the owners themselves handle the daily operations.
Additionally, it can be manager-managed where the owners hire an external person to handle the business’s day-to-day operations. An LLC is not limited to how many owners it can have. It also allows you to view how profits are shared among the owners. However, this depends on the operating agreement.
5. The Laws of LLCs Vary by Region
Some states regulate the type of businesses that can be formed via LLC. For example, some states disallow firms in the financial service field from forming an LLC. Financial experts say this happens since tax issues are considered, especially with variations in different state tax laws. Sometimes, an LLC is a good idea as it might allow a business to operate with plenty of investors. This allows the flexibility to dispense income how the investor deems fit from a year-to-year basis. However, this only happens if they have adopted the partnership tax treatment for the IRS. The bottom line here is that LLCs’ laws vary by state. It would be best to check the laws in your state before choosing your business structure.
6. Setting up an LLC
Many states in the USA allow the formation of LLCs. Forming your LLC is not as straightforward compared to a sole-proprietorship. However, compared to a corporation, the process is more precise. Some of the actions you will need to consider are AOI (Articles of Organization). If you’re planning to form an LLC, you’re required to file an AOI with the Secretary of State.
Additionally, you will have to pay the required fee. You can prepare an AOI by yourself or hire a lawyer for the same. The second action is the operating agreement. This is not a requirement in many states, but we advise doing it. The operating agreement helps define key points like ownership, responsibilities, ownership changes, and profit-sharing.
7. Choosing the Name
Naming rules differ from state to state. Generally, you are disallowed from using a name that is already in use. Financial experts recommend being unique and original when choosing a name. This helps to avoid confusion and any potential trademark infringement claims that may arise in the future. If you have selected an available name but are yet to file the necessary LLC documents, you might need to reserve it. This means no one can claim it before you file your forms. Additionally, the reservation period differs from state to state. Some areas have online databases where you can check if your desired name is available.
We hope this write-up provides you with the necessary information you need to understand about LLCs. You’re now one step away from setting up your dream limited company liabilities. If you’re having problems in the setup, you can consult an attorney or a local accountancy firm to help form your LLC.