An LLC is a hybrid entity that limits the liability of the owners, investors, and shareholders involved in an LLC. If you are thinking of starting a business and you’re not sure how you should register, know that you have a lot of flexibility in your choice. But, how you register will determine how financially responsible you or the other investors are in your business. This article will answer what an LLC is and why you might need an LLC for your new business:
What is an LLC?
An LLC stands for a Limited Liability Company. This is one way that a business can register in the United States, or a handful of other countries, as a way of protecting those who financially invested in the business. When a business is an LLC, the investors, stakeholders, and owners who have financially contributed to the growth of a business (outside of consumers), will not be held financially liable in the case that the business goes bankrupt, is insolvent, or liquidated.Individuals, businesses, foreign individuals, and foreign entities can all be considered the “owner” of an LLC. Contractually, the owner of an LLC is not referred to as the owner but instead as a member. There are numerous types of LLCs that you can register as, including a single-member LLC (which is like a limited liability company but for a sole proprietorship) and a limited liability partnership. By registering in the limited liability tax bracket, the personal assets of individual and entity investors are legally protected.
Why Should You Consider an LLC?
Most businesses who are seeking external funding or external financial support should consider becoming an LLC. This is because if you are not an LLC and instead are a sole proprietorship or partnership, personal assets of investors who are not members can be held liable in the instance that the company owes a debt. By becoming an LLC, this places restrictions on the company’s money for accounting and tax purposes. Without being an LLC, owners might have a hard time finding investors. If the LLC registered company goes bankrupt, the personal income and assets of the owner cannot be touched. If anyone invests in an LLC either with their own money or through stocks and the LLC goes under, their personal assets will remain safe. Outside of seeking funding, companies can benefit by being an LLC as they do not have to pay federal taxes for their business. Instead, those taxes are listed in the personal income tax returns of the owners as profits and losses.
Disadvantages of Being an LLC
While being an LLC has major advantages, there are also some disadvantages. One of the biggest disadvantages would be when one of the owners (otherwise referred to as a member) either passes away or goes bankrupt. If one of the owners goes bankrupt, then the entire LLC might need to be dissolved. This is one of the many reasons that people decide to incorporate rather than become an LLC. Other disadvantages include the cost. Compared to a partnership or sole proprietorship, being an LLC is far more costly. If this step is not required, it might be an added and unnecessary capital cost that is slowing down your time to market. Additionally, an LLC might be required to contribute unemployment compensation taxes which would otherwise not be required as a sole proprietorship. This is because as an LLC, even a single-member LLC, the company is then obligated to account financially for the loss of income for its employees, even if you’re the only employee!Strict records must be kept for an LLC, which separates personal and other business transactions. So if you have an LLC, you will need to open up a dedicated business bank account as well as setting up individualized payment systems or accounts.
Forming an LLC
Forming an LLC is relatively straightforward, but the individual steps will vary depending on the state in which the business resides. That is why the first step in forming an LLC is selecting your business’ state. Once you have selected your state, you will then need to decide on a name. Naming your LLC is important because it is your business's brand and identity. Setting up an LLC can be simple with tools like NewLLC’s step-by-step guide to naming your LLC, starting your LLC, and getting your business off the ground.Once you have chosen a state and name, you’ll need to choose a registered agent that acts on behalf of your LLC. You can act as your own registered agent or you can hire a third-party registered agent. A third-party registered agent is a responsible party or person who will send and receive all legal papers on behalf of the LLC. This might include legal documents, registration documents, tax documents, legal summons, filings, or more. The registered agent is required by most states in order to register an LLC. If a registered agent is not required by your state, it is still recommended that you get a registered agent anyway. The registered agent must be in or have an address in the same state that you’re doing business or a corporation that is authorized to conduct business in that state. Once the registered agent information is set, you can then file your paperwork with the state that the business is registered in. To file, you must also include an Articles of Organization, which will map out your LLC’s governance, including the member powers, rights, responsibilities, and liabilities. And finally, your LLC will need an LLC Operating Agreement. Much of the information from the Articles of Organization are often included in the Operating Agreement, in addition to information about distributions, membership changes, capital contributions, taxes, and more. Once you file your paperwork, you’ll receive an employer identification number (EIN) and be registered as an LLC!
Setting Up an LLC is Easy!
Naturally, starting any new business can feel daunting, especially one that is slightly more complex like an LLC. But, with the help of NewLLC, you can have all the tricky information sorted with relative ease. Let NewLLC and their partners help you choose a business name, register your LLC under the correct state, and get you set up with all the necessary paperwork!