Should you open an LLC when you start your new business? Or should you convert your current business structure to LLC? Some business owners do whatever is easiest to get up and running.
However, your business structure determines how you’ll pay taxes, what insurance you need, as well as the extent of your personal liability. It’s worth taking some time to determine if an LLC is the right choice for you.
What is an LLC?
A limited liability company, or LLC, is a hybrid business structure that has some characteristics of a partnership and some of a corporation. It’s a formal partnership agreement registered with a state, but it’s simpler to set up than a corporation.
Like a corporation, it shields its owners from personal liability for the company’s debts. If the business goes bankrupt, no one can come after your home or other personal assets to satisfy the LLC’s obligation.
Unlike a corporation, an LLC may choose not to pay taxes itself. Instead, profits are passed through to the owners for them to declare on their personal tax returns. In many circumstances, this provides a tax advantage for the owners.
An LLC can be owned by one person or several, or even by another business entity. One person can own multiple LLCs. The specific rules are a matter of state regulations and vary by state.
Steps for Opening an LLC
While LLC regulations vary by state, there are standard steps to follow no matter where you do business.
- Step 1: Select your state.
- In most cases, this will be where you live. You don’t have to register in your home state, but you may incur fees and extra paperwork if you register elsewhere. If you have a presence in other states, you’ll need to register there as a foreign LLC.
- Step 2: Choose a name.
- States have different rules, but all require that you include either the phrase Limited Liability Company or an abbreviation.
- Step 3: Designate a registered agent.
- This is a person or entity that sends and receives legal documents on your LLC’s behalf.
- Step 4: Register the LLC with your state.
- Follow your state’s process, pay the fee and provide the required information, including member names, the business name, the address, the name of the registered agent, and the purpose of the LLC.
- Step 5: Create an operating agreement.
- This outlines the structure and the roles of the owners. Not all states require it, but it’s a good idea for clarity of responsibility.
- Step 6: Comply with tax and other regulations.
- Get a federal Employee Identification Number (EIN) even if you don’t have employees. Register for state tax if your state has it. If you’ll be selling products, register for sales tax. Set up unemployment insurance. Obtain any required state and local licenses.
- Step 7: Remain in good standing.
- Keep abreast of state regulations and adhere to them.
Pros of Opening an LLC
Key benefits of an LLC include:
- Personal asset protection
- As the name implies, your liability is limited. You can lose your business, but you can’t lose your home or your personal bank account.
- Pass-through taxation
- An LLC isn’t directly taxed but passes its profits through to the owners. It simplifies the taxpaying process and eliminates the double tax liability that exists for corporations and their owners.
- Flexibility
- Individuals, partners, and business entities can own an LLC. It’s more streamlined than a corporation because owners directly run the company rather than working through an elected board.
- Builds credibility
- An LLC is recognized by the state as a formal business. When the letters “LLC” appear in your business name, it demonstrates that you take the steps to operate your business in a professional manner.
Cons of Opening an LLC
There are a few potential drawbacks:
- You’ll have to meet state requirements for annual reporting, and you may have to pay fees.
- Personal and business finances must be kept strictly separate.
- It can be a difficult transition if you decide to take the company public.
- You generally can’t change the membership of the LLC. To allow an owner to leave or to bring a new one in, you’ll usually have to dissolve the LLC and open another one.
Still, LLCs are the country’s most common business filing, so most owners don’t find that the pros outweigh the cons.
Bring an Accountant on Board
Once you’ve opened an LLC, you’re just getting started. There’s budgeting, forecasting, bookkeeping, and tax planning to think about. You didn’t start your business to do these things, but they’re critical to your success.
That’s why you should engage a trusted accountant to help manage your finances. That way, you can concentrate on serving your customers by doing the things that you do best. Contact Pasquesi Partners today and talk to one of our experts. A free 20-minute call will show you how we can help your business grow.