Maybe, you jumped in to the market with your small business out of the passion and love for the product or service you intend to offer. However, as soon as you kick-started the process of launching your dream company, the legal rulings and associated decision making are taking your senses away from that early excitement. One of the biggest concern for any small business entrepreneurs is forming the Limited Liability Company or LLC. To make things easy for you and to help you forward here are seven basics you should know before opening your LLC.
Learn The LLC First
As an entrepreneur, you have more than one choice to decide your business structure. Lone proprietorship, partnership, corporation or LLC – each has their own details as well as advantages and disadvantages. Review well the different structures and know the definitions, study what they offer and what they can’t do for you. The LLC is like a hybrid that combines the best of partnership and corporation with an added flexibility in reporting requirements compared to corporations – which suits the start-up small business in the best form. Do your research and learn what an LLC is and what it is not.
Advantages Of LLC
In an LLC structure, you are free to decide how your company should be taxed, you can define and operate the management rights and regulations, and how profit and loss are shared among the members. Entrepreneurs can transfer the assets in and out without thinking about the taxation and the LLC frees the owners from any personal liabilities for the debts. Most importantly, it gives you the flexibility you want have with a start-up.
Downside Of An LLC
Though there are many advantages, there are some downside with an LLC too. If you are sole entrepreneur, your LLC would be considered as a sole proprietorship for taxation, which might take the tax-benefits away from your LLC. To avoid such issues, you may share a small percentage of your business with a close relative or friend, but spouses are not counted as a partner. So, look around and find someone to partner with you in your LLC.
LLCs & Types Of Businesses
LLC is the most popular and suitable business structure for almost any type of small businesses. However, if you cherish a goal to make your company public in future, LLC is no more the best choice over a corporation. The process of converting an LLC in to a corporation could incur a high tax, so it’s better to know your future plan before you embark your journey. Also, another important point to know is LLC structure can’t get a financial support from the venture capital firms.
Process Of Forming An LLC
The process of LLC formation is quite straightforward and simple, if there is no added complications to your plan. First of all, pick a unique name for your company. Most states do not allow similar name for different business and also you want to avoid any confusion or infringement debates. Check for the availability of the associated domain name too. If you want to delay the launch of your business, you may go for the reservation of the name by paying a small fee and filing up the appropriate form. Get LLC organizational articles form from the Secretary of State office and fill it up.
Decide for the person who would serve as your registered agent. The purpose of the agent is to receive and deliver any legal documents like subpoenas or lawsuits. Any person above 18 can be named as your agent who lives in the same state where your company operates, or a member of the LLC can do the job too. There are companies who may offer the service on payment.
LLC Operating Agreement
LLC operating agreement defines the operational details of the company. Even though the state doesn’t demand this document, but it is very important in running your company smoothly. This is the place where you define the rights and responsibilities of the members, the rules for profit and loss sharing and distribution, rights of the deceased member, regulations to withdraw from the company, the plans for company’s dissolution, meeting requirements, procedures and schedules and all other legal details. Plan well ahead for this document and discuss with other business partners to clarify issues and contentions.
After knowing these things, you should be in a much better position to decide if you should form an LLC or not for your small business. If you choose to establish an LLC, you need to submit your tax ID application to get your EIN which is needed for hiring and paying employees.