Starting an LLC: What You Should Know
So you want to be a business owner.
Does this mean that you have to be super confident to start a business? Not necessarily.
Many people think that starting your own business is only for the bravest among us, but there are actually many ways to protect yourself when trying to become your own boss. One of these is starting a Limited Liability Company (LLC).
An LLC is a business structure that is legally separate from its owners. This means that it enables you to avoid the personal liability dangers that come with a partnership or sole proprietorship.
In addition, LLCs have less strict paperwork requirements in comparison to corporations, and they afford much more flexibility in a number of areas. Read on to learn more about the advantages of starting an LLC, some potential disadvantages, and the necessary steps to begin one.
What Are the Advantages of LLCs?
There are many advantages to starting your business as a Limited Liability Company. When considering all the benefits of this type of structure, it’s no surprise it has been steadily growing in popularity over recent years.
Some of the main advantages of starting an LLC are as follows:
- Limiting your personal liability
- Avoiding double taxation because of flow-through taxation
- Pass-through deductions
- Easier to hold appreciating assets such as real estate, stocks, and intellectual property
- Less paperwork
- More flexibility in allocating profits and losses
- Excellent privacy protection
- Superior protection in certain areas
- Higher flexibility in management
What Are the Disadvantages of LLCs?
Despite the myriad of advantages to forming an LLC, there are some cons that come with this type of structure. These can vary from state to state and depending on the purpose of your LLC, so it’s worth looking into your particular area’s regulations.
Below are some of the challenges that you might face when using an LLC business structure:
- Profits are subject to medicare and social security taxes
- Profits must be immediately recognized
- More diligent record-keeping may be required
- There can be extra fees for LLCs in certain states
- Some states do not allow certain groups (such as doctors) to act as an LLC
- Consent of membership is necessary for all interest transfers
- Reduced asset protection
How to Start an LLC
Pick a State and Name for Your Business
Now that you’ve familiarized yourself with the advantages and disadvantages of forming an LLC, it makes sense to cover the actual steps necessary to create this type of business.
The first of these is to choose in which state you will register your business. Once you have picked the location for your business, you must also pick a name that isn’t already registered within your state of choice. The name must also include the suffix of Ltd, LLC, or LC.
Select a Registered Agent and File the Articles of Organization
Once you have selected a name for your business, almost every state requires you to name a registered agent. This is a person who agrees to receive subpoenas, lawsuits, and any other official documents on behalf of your LLC. Their role also includes passing these along to the appropriate person at your business.
After you’ve selected a registered agent, you must file the articles of organization. These should contain the following information:
- Name and address of the LLC
- Registered agent’s name and address
- The duration of the existence of the LLC if not perpetual
- The purpose for which the LLC formed
This document must be signed by the person creating the LLC and in some states, the registered agent is required to sign too. Where this document should be filed also depends on the state, but most commonly it will be with the secretary of state. The charging fee also typically varies between states.
Create an Operating Agreement
Finally, the last step in the formation of an LLC is to prepare an operating agreement. This document outlines how your business will be run. It specifies rules such as ownership interests, member voting rights, and the allocation of profits and losses.
The agreement also describes the audit of books and records, arbitration/forum selection, the departure or entry of members, fiduciary duties, tax issues, corporate governance, dissolution, and non-compete clauses.
Your operating agreement also has a significant degree of flexibility. You can add extensive laws and regulations or keep it simple with only a few rules and requirements. This will ultimately depend on what kind of business you want to run.
