Once having chosen the different route and starting your own business, rather than slaving off at an office, you need to decide what sort of business you want and this is not only in terms of the product(s) your business will deal with but also the structure of your business and how you can protect yourself and your business during the down phase. The main aspect that affects all business is taxation and for business owners, it is important that they plan the business and choose the legal form under which they will start their business.
In the US, the choices are amongst sole proprietorship, general partnership, C corporation, Limited Liability Corporation (LLC) and S corporation. Out of these the Limited Liability Corporation or LLC is more favored.
What is the Limited Liability Corporation?
Talking of best of both worlds, an LLC offers the same to the business owners i.e. an LLC is a mix between a corporation and a partnership where like a corporation it protects the owners from bankruptcy and lawsuits by separating personal assets from the company ones and like partnership the incurrences of profit and loss are divided amongst the partners. While it says divided amongst the partners, many US state recognizes a single person LLC also so the business is completely under your influence.
The reason for the popularity of this tax form is that your personal assets are free from coming under scrutiny in case your business incurs a heavy loss unless you have personally invested something personal in the business in which case that becomes part of your company asset. Another benefit is that if you or your business partner incurs any personal loss then the business is protected from your creditors. Talking about the advantages we also need to chart the disadvantages too.
Advantages of an LLC
- As mentioned above, and one of the most popular selling points of the LLC concept is the separation of personal and company assets. This is a two-way street where personal or company’s gain or loss will not affect the other.
- Like the sharing and bearing of the profits or losses made in the business, the taxation too is borne by the members of the LLC and not the company itself. This is known as Pass Through Taxation and is reflected as personal taxes. In the case of single-member ownership, the taxation is, in accordance with the Federal Law, akin to that of sole proprietorship or partnership.
- There are no restrictions in the number of members that can be part of the LLC. Whether they are foreigners or already business owners, individuals can form an LLC. The citizenship does not matter to be part of an LLC so someone from another country can join an LLC is Texas and be treated as a member and enjoy the benefits that the citizen member of the LLC are enjoying.
- Another huge advantage of an LLC is the option of choosing the taxation method. This versatility gives LLC an edge over other business taxation and legal forms because members can at any time choose whether they want the taxation to be according to either one of the corporation type.
- In a corporation, the profits are distributed amongst the shareholders in accordance to their percentage of shares in that company which is equivalent to the fact that a maximum number of shareholder is the most powerful entity in that corporation. In the case of an LLC, the member can choose how the profits will be distributed, whether equally or follow the investment percentage and distribute accordingly.
- The number of rules and regulations that must be met for an LLC is more relaxed and less as compared to a corporation where annual meetings of the board members is a must, then following the bylaws and have to maintain formal minutes of the meeting. For an LLC, there are no hard and fast rules to maintain formal charts and hold meetings.
Disadvantages of an LLC
- Pass-Through taxation is a benefit but it also sometimes is a disadvantage especially when the tax you are bearing personally is higher than that the company has to bear. Since an LLC does not follow much strict compliance rules, the tax is deducted from personal income and not as company taxes which includes medical insurance and security deposits too.
- Even though you are not required to keep documents pertaining to company meetings, you are expected to keep a detailed personal and business record as taxes are deducted from your personal income. This means you need a separate business bank account that will be in tally with the LLC and the expenses.
- One of the biggest disadvantages of the LLC is that with the departure of a member from the LLC will cause the LLC to terminate which is not the case for a corporation.
How to Start an LLC
Forming or starting an LLC is not a difficult feat provided you know what business you want to do and if that business is suitable provided the place you live in. every US state has its own laws pertaining to LLC and that too contributes to your final decision. Usually, people prefer to start an LLC at their home town but in some cases starting an LLC is another state will provide more fruitful, hence deciding on your business and researching on the advantages and best options is the prerequisite step.
After this, there are just five steps that you need to walk to have your LLC.
- Choose a name – the name should be in compliance with the state rule and respect the use of prohibited words as stated by the state rules. The name should also have the indication of the company type be in abbreviated or in full form, for example, LLC or Ltd. Co. You also need to make sure that the name is unique and unregistered. You can find out about the available names from the state office.
- File articles of organization – articles of organization are basically documents pertaining to certificates and paper works that are required for the formation of the LLC and these information documents are the LLC name, address, and names of the members. Different states have different requirements. These files and documents are required after you have selected the company name. Here you need to include filing fees and the fees for the registered agent who will be in charge of the legal aspect of the LLC.
- LLC operating agreement creation – while LLC is more laid back, you can still create, and it is advised that you do, set of rules in terms of operations and ownership. This will help you overcome the disadvantages especially in the case where the company is threatened with being dissolved due to a member’s departure.
- Publication of notice – required by some states, you should publish a formal notice through media making the LLC official and also stating the intent of the company.
- Licenses and Permits – after making your LLC official, you need to obtain federal licenses and business licenses before embarking on the journey.