Are you planning to start a new company, but haven’t decided on a structure yet? Learn the facts about LLCs you must know if you’re considering starting an LLC.
So, you’ve decided to start a business.
You’ve got an idea in your mind and want to establish a company for your business.
But there are multiple different company structures to choose from, and it can be easy to get confused.
From sole proprietorship to corporations, there are different options and each has specific requirements.
Among these, Limited Liability Company (LLC) is a structure that will pop up regularly.
After all, LLCs are among the most common types of companies.
But what is an LLC?
Let’s find out.
What is an LLC?
LLC is a hybrid company structure that has the features of both partnerships and corporations.
How is it a hybrid, you might ask?
LLCs take some features from both partnerships and corporations. For example, it has flow-through taxation just like partnerships and limited liability like corporations.
So, now that you know what LLCs are, let’s take a look at their advantages and disadvantages.
Why are LLCs Good?
One of the biggest advantages of LLCs is that they’re fairly inexpensive to form. The process of formation is simple too.
All you need to do is file your LLC Articles of Organization with the Secretary of the State.
The LLC exists as a separate entity. This means that it requires a Tax ID Number.
Also, limited liability means that the members of the LLC can’t be held personally liable for any debts that the LLC accrues.
And that’s not all…
When it comes to profit distributions, LLCs give you a lot of flexibility. You can decide on the profit-sharing structure.
Unlike the rigid 50-50 in partnerships, you can choose your own structure in LLCs.
You also save money when it comes to tax.
For single-member LLCs, the income of the LLC flows through to the individual. This means that you only pay your personal tax.
In the case of multi-member LLCs, the members will have to pay self-employment taxes too. To avoid this, you can choose to be taxed as an S-Corp. This can help you avoid double taxation.
Lastly, maintaining your LLC is easy too. You don’t need to maintain any formal meeting records or resolutions.
While there are the many advantages of LLCs, let’s take a look at their disadvantages as well.
What are the Disadvantages of LLCs?
LLCs are easy to form but not as easy as sole proprietorships or partnerships.
With an LLC, you need to do state-level and federal-level filings.
Additionally, you need to pay state filing fees yearly from the time of formation.
What’s more, you might ask?
If you intend to go public with your company, LLCs may not be your best bet.
While corporations may not be as easy to manage, they’re better suited if you’d like to go public or issue employee shares.
If you’d like to get investors for your company, a corporation structure is better than an LLC.
So, now that you know the advantages and disadvantages of LLCs, let’s take a look at how you can form one.
How Can You Form an LLC?
If you want to establish an LLC, you need to get an LLC EIN Number. After that, you have to file your Articles of Organization with the Secretary of State.
Once that’s done, you also need to create an operating agreement between the members of the LLC.
This agreement must define the functioning of your business.
You also have to pay the fees for filing the articles.
But there’s a lot more to LLCs than this. To learn more about how you can form an LLC or its pros and cons, you can check out this infographic created by GovDocFiling.
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