One of the most important choices companies need to make involves business entity structures. The decision will have an impact on the taxation of the company. At the same time, it will also determine the type of paperwork the business has to accomplish and the obligations it will have with the state. Perhaps one of the most popular options for startups in the United States is the limited liability company (LLC). But what makes this structure appealing? LLC formation comes with many advantages. Generally, the process is easy to follow. It is also an inexpensive way to structure a business entity.
Here are the other reasons why an LLC formation can be good for business:
Similar to a corporation, an LLC is a separate legal entity. That means the owners, who are known as members, will not be personally liable for the actions of the company. It also provides asset protection, so the personal belongings of members will not be affected even if the company ends up incurring debts.
Flexibility in Taxation
Another advantage of an LLC is that it can choose how it will be taxed. By default, it is treated as a pass-through entity like a sole proprietorship and partnership. That means it is not taxed at a corporate level. Instead, the members report business income and losses in their personal tax returns.
LLCs also have the freedom to choose to be taxed like a corporation if they deem that treatment more beneficial and appropriate.
Flexibility in Administration and Management
LLC formation requires fewer corporate regulations compared to that of corporations. For instance, an LLC does not have to hold annual shareholders’ meetings. There is also no need to create a board of directors.
Unlike corporations, LLCs do not have to maintain detailed records such as minutes of meetings. Even if the company has an operating agreement, it will still be open to making changes.
Flexibility in Ownership
Another feature that makes the LLC formation unique is that it does not have strict regulations when it comes to ownership. States do not require LLC members to be residents. In fact, even individuals who are not U.S. citizens or other business entities can become members of an LLC.
Various Types of LLC Formation
There are various types of LLCs. A company can choose which one applies to its circumstances.
Based on the number of members, an LLC can be single-member or multi-member. As the term suggests, a single-member LLC is for sole owners. Meanwhile, a multi-member LLC is suitable for those with more than one owner.
Depending on the management structure of the LLC, it can either be member-managed or manager-managed. A member-managed LLC is when all of the owners share the responsibility of managing the company’s business operations. On the other hand, a manager-managed LLC is for those that choose to appoint certain members or hire non-members to take care of the day-to-day operations of the company. To learn more about this, check out our article on the LLC Management Structure.
Choice in Location
A company can choose where it will form an LLC. Since states have different laws, the requirements, fees, and obligations will vary. Members can choose a state that offers the most benefits for the company. An LLC can also operate and register in multiple states.
Generally, the process of LLC formation is easy. While it may include several steps, each of them is simple to do. The company will only have to make sure it completes the necessary tasks to prevent any issues. Some of them are the following:
- Choosing an appropriate name that complies with state rules
- Selecting a registered agent
- Filing formal paperwork with the governing agency, such as the Secretary of State
- Getting an Employer Identification Number (EIN) from the IRS
- Obtaining additional business licenses and permits if necessary
- Submitting annual or biennial reports
For state-specific guides on how to start an LLC, read this article.
Additionally, states do not require the LLC members to handle the registration process. Companies can hire a third-party organization like DoMyLLC to take care of the preparation and filing of formal paperwork.
There are many advantages to choosing the LLC formation. However, it also comes with responsibilities.
While the state process is easy to understand, some entrepreneurs may still find it overwhelming due to the several tasks that need to be completed. Fortunately, there are organizations such as DoMyLLC that can assist new companies with the entire process. Contact us now to find out more about our services.