The Entrepreneur’s Guide to Choosing an LLC: A Smart Start for Business Ownership
What’s the most important decision that entrepreneurs face? There are plenty of qualified candidates: For example, there are crucial, make-or-break decisions about your business name and branding. That’s to say nothing of the choices you’ll face about how to secure financing, or how to define your target audience.
But there’s one additional decision that may be even more foundational. It’s the decision over what type of legal structure to choose for your small business. In fact, your choice regarding legal structure can have a huge impact on all of these other decisions.
So which business structure is best? There’s no one right answer, but for a majority of entrepreneurs, the sensible solution is to register as a Limited Liability Company, or LLC. LLCs rank among the most popular small business structures, and they lend themselves well to startup success in virtually any industry or niche.
This post will define the LLC, and list some of the reasons why entrepreneurs might consider it. Additionally, the post will share a step-by-step guide to LLC formation.
To begin with, what is an LLC?
Here’s one way to think about it: When you first begin generating revenues for yourself, on the basis of self-employment, the government automatically classifies you as a Sole Proprietor. You can continue to generate revenues on the basis of a Sole Proprietorship for as long as you want, though doing so makes it challenging to hire employees. The thing to know about Sole Proprietorships is that they don’t create new legal entities; in other words, as far as the law and the IRS are concerned, there’s no real distinction between the business and its owner.
Registering your company as an LLC actually allows you to create that distinction, establishing your small business as its own separate entity. As a member of an LLC, you’ll have the opportunity to keep your personal assets apart from your business ones. Likewise, you’ll have options to keep your personal and business liabilities totally distinct.
Why Choose the LLC?
So why does any of this matter? And what makes the LLC format so meaningful for entrepreneurs?
There are a number of reasons why LLCs make sense for business startups. Consider:
- They provide personal liability protections. First and foremost, by keeping your personal assets and liabilities separate from your business ones, LLCs allow you to safeguard your personal and familial wealth from lawsuits or creditors. As such, you can invest in your business without worrying that your car, house, or family savings accounts could ever be compromised.
- They provide a low threshold for entry. While there are a few regulatory steps and some nominal fees required to establish your LLC, starting this type of business is ultimately much simpler than starting, say, a Corporation. It offers fledgling business owners a very light administrative burden.
- They offer managerial flexibility. When you’re starting out with a new business, you may not have a clear sense of how you wish the company to be run. Luckily, LLCs provide you with wiggle room to choose from any number of options, even pivoting as your business changes. You can run the show yourself, bring in partners, or even hire an external business management company.
- They create tax flexibility. Something else to note about LLCs is that they let you choose how you wish to report taxable income to the IRS, providing options for pass-through or corporate taxation. Again, having some flexibility is nice, as it means you can adapt to the changing needs of a growing company.
- They offer respectability. Entrepreneurs should also note that registering an LLC allows you to open business bank accounts, and to start accepting payments directly to the company (as opposed to payments made out to you, the individual). All of this ensures a certain sheen of professionalism, helping your business to be seen as legitimate and credible.
- They can help attract investors. That credibility makes it easier for you to bring investors into the fold, or to open up the types of business lines of credit that you just can’t get as a Sole Proprietor. For entrepreneurs worried about startup funding, this is a central benefit to the LLC structure.
The bottom line? LLCs offer a lot of built-in advantages that can help position your new business startup for lasting success.
How to Register Your LLC
That brings up the other central question: What are the steps required for registering your LLC?
The first thing every entrepreneur should know is that the process for registering an LLC can fluctuate a bit from state to state. So, learning how to form an LLC in Texas may be a bit different from mastering how to start one in New York. With that said, there are certain steps in the process that tend to be pretty consistent across the board. Here’s roughly what you can expect from the LLC trajectory.
1. Register Your Name.
Before you get too deep into the LLC journey, you’ll want to brainstorm a good name for your company. Crucially, this decision is about more than just marketing and brand building. It also has some legal implications. That’s because most states require LLCs to have names that aren’t already claimed by other LLCs in the state.
Usually, the state will offer some kind of online LLC directory, providing an easy way to verify that the name you want is still up for grabs.
2. Appoint Your Registered Agent.
Every LLC is required to have someone designated as their Registered Agent. The job of the Registered Agent is to receive legal and tax correspondence on your company’s behalf; for example, if your startup ever faces a lawsuit, the papers will be served to your Registered Agent.
The Registered Agent can be either an individual or an organization. In some states, you can serve as your own Registered Agent, while other states require you to hire a third-party service. (Note: Third-party services can cost as little as $50, so this usually isn’t too burdensome.) One requirement is that the Registered Agent must have a mailing address (not a P.O. Box) in the state where you’re registering.
3. File Your Paperwork.
As you might imagine, establishing a new legal entity requires you to submit some paperwork to the government, specifically, a document called your Articles of Organization. The details of this document can vary by state, but usually, it just involves some basic information such as your business name, the names of any partners, contact info for your Registered Agent, and so forth.
Most states do require a small fee for processing your LLC paperwork. You can expect it to be anywhere from $15 to $300.
4. Establish an Operating Agreement
The law does not require you to have an Operating Agreement in place, but it is generally prudent to do so. This document provides ground rules for how your LLC is run and can cover things like how duties and profits are split between partners. Basically, it’s an important document for minimizing disharmony between partners. And, if there is disharmony, it can shield you from any undue legal conflict.
5. Get an EIN.
Your EIN, or employer identification number, is sort of like a Social Security Number, only it’s for a business entity. Since you and your LLC are indeed separate entities, you’ll need to ensure the business has a legally identifying number of its own.
If you are a U.S. resident, the IRS will give you an EIN for free. All you have to do is go to their website and request one. You won’t necessarily need this number immediately, but you will need it before you can file taxes or process payroll.
6. Set Up a Bank Account.
In order to keep your personal and business assets separate, you’ll need to have a bank account that’s just for your LLC. This should be totally disconnected from any personal checking or savings accounts that you might have.
7. Keep Up with Annual Filings.
To maintain regulatory compliance, you may need to:
- Furnish your state with a brief annual report, mostly confirming your contact details.
- Let the state know if you change Registered Agents, or if your Agent changes their mailing address.
- File annual LLC taxes. (Currently, this is necessary for California business owners only.)
Establish Startup Success by Registering Your LLC
Business owners face a number of formative decisions, not least their decision over legal structure. Generally speaking, the LLC model is the best bet. With further questions, don’t hesitate to talk with an attorney or business coach in your area.
Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about entrepreneurship, small business management, and content and social media marketing.