Starting a business can be thrilling. The late nights. Plenty of hustle and bustle. All of that work going towards building something you own. You’re your own boss and that feels pretty good. There are a lot of important decisions to make when you start a business. Chances are, a few details are going to slip through the cracks.
One thing you may have forgotten about in the midst of filling orders or looking for office space, is whether or not you want to register your business as an LLC. You’re busy, so let’s do a run through of the pros and cons of registering as an LLC, and evaluate whether or not you should register your business as one.
What Is An LLC?
First, let’s cover the basics. What is an LLC? To paraphrase the definition from the IRS, an LLC is a business structure that legally separates the business from its owner. “LLC” stands for “Limited Liability Company.” While most businesses can qualify as an LLC, banks and insurance companies cannot. The rules regarding LLCs vary by state, with each potentially using different regulations. You should check with your state first before registering to ensure you are in compliance with their regulations.
As an owner of an LLC, you are a “member”. As most states don’t restrict ownership, a member can be an individual, corporation, or other LLCs and foreign entities. There is no maximum number of members, although most states allow “single-member” LLCs, which have only one owner.
To clarify, an LLC is not a corporation. There are multiple types of corporations, but essentially a corporation (or C corp) is a legal entity that is separate from its owners. The intent is similar to an LLC, but differs in execution. A corporation is taxable and legally liable. While this structure offers the strongest legal protection to its owners, the cost is higher to form and maintain a C corp than an LLC. To form a corporation also requires more substantial record-keeping, reporting, and operational processes.
Pros And Cons Of Forming An LLC
Like any decision in life, there are both pros and cons to registering your business as an LLC. Essentially, this is what you need to know about why it appeals to business owners. An LLC can limit liability and can help make your taxes easier. One of the biggest cons is that your business income will be subject to the self-employment tax.
You can read about the pros and cons in-depth in this article. We’ve summarized some of the top considerations here.
Reasons You Might Prefer An LLC
- It will be easier to calculate and pay taxes.
- You can also choose to pay taxes as a corporation. This creates a separate taxable entity that has taxpaying obligations.
- An LLC is relatively inexpensive to establish. In some states, the required fees are less than $100 to start an LLC. The national average cost is around $500.
Considerations About LLCs
- You do not have absolute protection against liability. Individual members of an LLC can be liable for its actions under certain circumstances. That means, your personal assets can be pursued in a lawsuit against a limited liability company that you own.
- Unless you opt for taxation as a corporation, your business income is subject to self-employment taxes on any money you take out of the business as income.
Should You Form An LLC?
Whether or not you should form an LLC depends on your business’ needs. No one can tell you exactly what to do here—it truly depends on your situation and your priorities. You may want to meet with your tax or accounting professional, an attorney, or a trusted financial planner to get their input before you decide.
If you’re considering whether it’s time to form an LLC, here are a few questions to ask yourself as you judge your readiness.
Are You Done Adding Or Removing Owners From Your Business?
Once you form a legal entity like an LLC, you won’t have the flexibility to make ownership changes without formal action. This consideration is particularly important if more than one person owns the LLC. This is also relevant if you would like more than one person to have ownership rights.
Whichever parties that file the proper documents with the Secretary of State are the official owners of the LLC. If you want to add or remove owners at any time, you will need to do so formally. And here’s the catch: you will do so in the form of a transaction. Removing an owner can be time consuming and expensive. Before you form an LLC, you need to make sure you and your business partners are on the same page regarding ownership.
If you find yourself in a situation where you need to change ownership, you’ll have to consult any operating agreement that you signed. Most likely, you signed one when forming your LLC. This agreement is a contract that applies to the members and specifies how the LLC will operate. Usually, this agreement includes buy-sell or buyout provisions that govern how you can transfer ownership. This process can be complicated depending on what your operating agreement stipulates. For example, the provisions in the agreement can place restrictions on who becomes a member, how you approve a transfer, or how to buy shares back from a departing member.
If your operating agreement did not include a buy-sell agreement, review your state’s statutes for how to transfer membership interests. It is wise to consult with a lawyer, however you handle the process of adding or removing members.
Do You Plan To Have Multiple Owners?
If your business has multiple owners, you may want to form an LLC because of tax considerations.
Forming an LLC can simplify basic accounting and tax obligations when you have multiple owners. Why? It offers flexibility that allows you to assign profits and losses to individual members. You can even do so in differing amounts. That way, if you are working with partners with different levels of investment, you can simplify your accounting.
Are You Concerned About Privacy?
An LLC shields ownership status from public knowledge. This feature may appeal to entrepreneurs who own multiple businesses or would like their association with certain businesses hidden from public view.
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Please consult a tax professional for information about tax laws and how they apply to your business.
Jacqueline DeMarco is a contributing business writer for Fundbox. A writer and editor based in Southern California, she has written on everything from finance to travel for publications including The Everygirl, Apartment Therapy, LearnVest, among others. In her spare time, she enjoys going anywhere she can spend time with animals.