Currently, many aspiring entrepreneurs planning to start a business prefer a limited liability company (LLC) as a business unit. There are several reasons for this, as it offers several advantages for doing business. However, this is not the only model to start a business.
We’ve put together a detailed guide for you to get you started with an LLC. Here, you will find tips and nuances to help you complete this procedure without a hitch!
LLC: The Essence & Subject
Why don’t you start your own business, as this is a promising prospect? Perhaps you have already discussed forming a business with someone from your inner circle? Maybe you have already received advice on setting up an LLC? Still don’t know what it means? – Then you have come to the right place!
We will devote you to all the nuances of creating and running an LLC. We will do everything so that you do not have a single doubt whether it meets the needs of your business!
The Essence of an LLC as the Business Entity
LLC is an organizational form of doing business, which includes elements of a corporation unit and sole entrepreneurship (general partnership).
It has several common features with a corporation, which imply the following capabilities:
- acquisition of real estate;
- opening bank accounts;
- attracting third parties as employees.
And most importantly, an LLC is a business unit that fully protects your assets! If the business experiences difficulties, the personal assets of the owners are not available to resolve them. In other words, creditors do not have the right to seize and confiscate the personal assets of the owners of the LLC.
The owners of an LLC are full or partial members. Each of them owns a business following the share assigned to him by the general council. Sometimes the owner of an LLC is only one member. So, it is very popular for creating and managing a business! This business unit assumes the protection of personal assets and the ability to be managed by multiple owners.
Restrictions That LLC Assumes
An LLC can have several owners, but none of them can buy their share to run the business, while the corporation provides such an opportunity. The owners of corporations can sell shares, but LLCs do not have this opportunity, even if they need additional investments. LLC owners must attract outside investors.
Also, LLC and corporations must submit different documents. It is this aspect that makes LLC such an attractive form for business owners. Corporations must pay maximum attention to maintaining:
- minutes of all meetings;
- minutes of the board of directors;
- minutes of annual meetings of shareholders;
- share registers, etc.
It is worth noting that the LLC owners must also file annual reports and take care of reporting documentation. However, the amount of paperwork regarding it is minimal.
The Proper Way to Form an LLC
From the point of view of settling formalities for setting up and running a business, LLC assumes a simplified process. The owner of the LLC must draw up and submit the memorandum of association to the office of the Secretary of State. It is the start of your business project.
To do this, the owners of the business project must provide the following information:
- Desired name;
- Personal data and signatures of all owners;
- Personal and contact details of the registered agent;
- The actual address of your business;
- The form of management implementation (who manages the business: managers or participants).
For comfortable running an LLC from a financial point of view, the participants need to conclude an operating agreement. It is this document that will become decisive in the functioning of your business project.
In general, the Secretary of State does not officially put forward such a requirement! However, you better not neglect the hanging of operational agreements! As in the future, you will be able to prevent disputes or resolve them in the most convenient way for everyone.
There are several convenient ways to enter into an operating agreement. Business owners can create an operating agreement with minimal legal assistance. Thus, you will draw up an operating agreement that will fully meet the individual needs of your business project. In addition, templates for an online service to start and maintain a business project are perfect for these purposes. It is ZenBusiness or Northwest Registered Agent.
So, if business owners are limited in time and cannot submit documents, they can use one of these services. Qualified specialists are ready to do all the paperwork and free up LLC owners to promote their business concept.
Starting an LLC: The Obvious Advantages
So, you can quickly and easily create an LLC and also manage it. The list of documents that you need to generate is minimal (compared to corporations). In addition, the list of requirements for annual reporting is also short.
However, keeping paperwork to a minimum is not the main reason to start an LLC. The main advantage of it over a sole proprietorship or general partnership is the ability to protect the personal assets of its owners.
If you are a sole proprietor or general partner, your company finance and personal finance are the same. That is why your personal property is at risk, as if the business has financial debts, it can be seized to pay them off. If you start an LLC, you will not face such difficulties.
Let’s analyze tax issues:
- An essential argument to start an LLC is an opportunity to choose a simple and convenient taxation method. Among the taxation options available are the corporation or cross-company model. Cross-border organizations are exempt from the need to file a tax return. Instead, they will need to draw up and submit an information report, which will indicate the exact amounts of income and expenses;
- This taxation model assumes that all members will receive income under predetermined shares. Further, each participant must report the amount of this income in the tax return and pay the appropriate taxes;
- So, the total amount of money of the income tax for an LLC is lower than it would be for the corporation as a business unit. At the same time, all owners will pay self-employment cess (15.3%). It also includes Medicare and Social Security;
- If the LLC acts as a corporation C before the tax department, it will be subject to corporate income charge (21%). This form assumes that all business participants will be subject to double taxation. It is because profits are charged once at the corporate level and then taxed again at the personal level. After the company funds are distributed among its owners, they will have to pay tax on these incomes again. This taxation option is acceptable for those companies whose owners have a high income and can save money by avoiding high tax rates on personal income;
- Alternatively, business owners can classify their LLC as an S corporation. It is a trade-off between the two options above. S-corp taxation involves elements of cross-cutting business units. Except that the owners can avoid self-employment tax as the S-corp model treats them as employees. However, there are many restrictions about the participation in S corp, which make this option less popular among future owners of the LLC.
So, now you know all the nuances of LLC taxation, and you can choose the most appropriate option for yourself!
Let’s draw some intermediate conclusions!
So, many business startups choose to start an LLC due to the combination of flexibility and the ability to protect personal assets! Our experts also agree that starting an LLC is the most optimal method of doing business of various kinds.
Perhaps it is the only acceptable business unit for your company. However, you need to analyze the structure of your company, what taxation suits you best, whether you need the protection of business assets, etc.
The Main Advantages to Start an LLC
1. Clarity of Formation & Maintenance
LLC is the simplest business unit currently available to residents of America. It is especially noticeable when you look closely at the comparison to a corporation!
If you want to start an LLC, you need to develop and file your charter and file it with your state secretary’s office. To start other business units, you will have to go through a lot of paperwork. Still, getting the support of a registered agent is helpful.
In addition, it is also straightforward to maintain an LLC. It is usually sufficient to prepare and submit an annual report and pay a small commission. In some states, there is also a franchise tax payment as part of the service process. From the point of view of solving the daily issues of servicing an LLC, these requirements are simple.
2. Minimum Formal Requirements & Cutbacks on Paperwork
Corporations have a responsibility to ensure that a lot of paperwork is done correctly. We are talking about the development of the charter, the maintenance of various minutes (meetings of shareholders, the board of directors, etc.), accounting books, etc.
So many formalities are difficult and time-consuming! But we have not even begun to talk about registration, which is associated with great time and financial costs. LLC looks much more attractive in this respect, especially when getting the support of a registered agent!
Fortunately, LLC owners don’t have to worry about these requirements. Of course, it also requires business records to be kept, but these are greatly reduced. All the owners decide about the meetings, while corporations must take care of meetings for shareholders and the directors’ board.
3. Possibility of Separation & Personal Assets Protection
An LLC, as a business unit, can take advantage of the Corporate Veil. Thus, a clear division is established between the finances of the company and the personal finances of its owners.
This separation is extremely important and therefore an obvious advantage to start an LLC.
It often happens that in the modern world, any business unit can meet with difficulties and litigation. So, the LLC can be forced to pay debts! But thanks to the Corporate Veil, they will recover all costs from the company’s business assets. If the finances are insufficient, the personal funds and assets of its owners are protected. However, you need to find a registered agent to represent the interests of your company.
Let’s take a look at a specific example. Let’s say you own a workshop and repair roller skates and skateboards.
For example, let’s say you repaired a skateboard for one of your clients who later broke his arm as a result of a fall from the refurbished skateboard. If the customer proves that the fall was due to poor quality repairs that you performed, they can file a claim for damages. It may happen that your workshop does not have enough money for this.
But you are a sole proprietorship! You will be instructed to use your assets to solve the problem. It means that you have to sell your personal property to pay off the debt!
If you decide to start an LLC, then you can avoid this problem. After all, the Corporate Veil will always protect your assets.
4. The Versatility of the Business Structure
Corporations are required to conduct their business activities under strict structural formalities. These requirements can be very difficult to comply with. But the owners of the LLC can choose the management structures. Corporations must comply with strict requirements, and the board of directors, officers, and shareholders must play different roles.
In addition, S-corporations must cope with other equally essential constraints. Unlike an S corporation, an LLC or C corporation can afford to have as many members as they want.
In addition, LLC members can be foreign investors. But S corporations cannot accept non-residents of the United States, and besides, the membership is also limited to a hundred. So, you’d better find a registered agent.
5. Suppleness About Taxation Issues
LLC owners can choose according to which scheme they will fulfill their tax obligations. They have the right to choose between a corporation and a transit organization. This flexibility is not possible with corporations. But the members of the LLC can choose any tax method.
As a rule, LLC owners prefer the default taxation option. This tax approach means that your business project will be taxed as a pass-through organization. This option assumes that the company itself will not pay taxes. All the members receive business income and report it on their tax returns.
If an LLC is taxed like a corporation, then it will pay taxes on its own. So, the LLC will pay corporate income cess. We have already said that this option is only acceptable for those LLCs whose members have a high income, and for them, the corporate tax rate will be lower than their tax categories.
The Main Drawbacks to Start an LLC
1. Difficulties in Attracting Investment Funds
LLCs can raise capital through external investment, but investors themselves are reluctant to do so. For foreign investors, corporations are the most preferable for investing money.
Most importantly, LLCs cannot issue shares and sell stakes in their business, while corporate stocks are very attractive to private investors. Also, venture capitalists avoid investing in an LLC, as the end-to-end business unit does not bring high returns to VC investors.
2. Self-Employed Taxation
Simplified taxation is an obvious advantage for LLC owners, but it causes difficulties when it comes to the taxation of self-employed.
Such difficulties are caused by the fact that the owners of the LLC are self-employed taxable individuals. They are subject to a 15.3% self-employment tax rate, and this rate is based on the payment of the employer’s and worker’s share of Medicare and Social Security. In contrast, corporate owners are not legally self-employed and are exempt from this tax.
3. The Different States Assume Different Requirements
The fact that each state has the right to develop its laws regarding the formation and management of business units is a disadvantage for an LLC. It is especially true for LLCs that conduct business activities in several states.
Also, LLC as a business unit has only recently entered the American business environment. It creates inconsistencies and confusion about how the courts of various states respond to claims involving LLCs. Indeed, in many states, there are simply no relevant precedents. It is better to enlist the support of a registered agent.
4. Running an Informal Business Comes With A Lot Of Troubles
If we take into account the comparison of LLCs with corporations, then the LLC certainly wins. However, if we compare LLC with individual partnerships or sole proprietorships, then it loses.
These informal business structures are devoid of the formation process and the difficulties associated with this issue. For example, this could be the payment of commission fees. Of course, sole proprietorship and general partnership have some significant disadvantages.
Just take the fact that they do not protect personal assets. But setting up and maintaining an LLC is certainly more problematic.
A limited liability company is a popular business unit that combines some of the benefits of a corporation with the profits of an informal business like a general partnership.
All this leads to the fact that you can start your own business, which will maintain legitimacy, and you will have the opportunity to support it professionally. You can act as a registered agent yourself if you are confident in your business skills. However, it is better to resort to the services of professional agencies to get a qualified registered agent on your staff.
However, we must emphasize that LLC as a business unit is not suitable for everyone! That is why you need to carefully weigh all the advantages and disadvantages before taking it as the basis of your business project.