If you’re starting a business for the first time, you might need some guidance as to whether you should form an LLC (or Limited Liability Company), and the following information should help you to make an informed choice:
What is an LLC?
An LLC is a legal entity with its own income, assets and liabilities, that is formed by one or more members, unlike a sole proprietorship, whose owner is personally liable for any claims against the business.
What are some of the advantages of an LLC?
With greater flexibility in ownership and taxation, LLC’s also provide their members with more legal and financial protection than a sole proprietor:
- Limited liability
If an LLC is sued, or experiences financial difficulties, then it’s the business itself that becomes the defendant, not its owner. Personal assets are at no risk should debtors come calling, which can be a huge consideration and plus point for many business owners.
- Ownership can be split
An LLC may be owned by multiple members, and ownership can be split in any number of ways, from evenly, to based upon specific shares.
- Tax rate options
LLC’s, while taxed as sole proprietorships or partnerships by default, can also be taxed as an S Corporation or C Corporation with the IRS, if an election is filed. Savings for larger firms on employment taxes can be made in this way, but you should try to seek advice from a tax professional to determine which tax structure would be favorable for your new business.
Are there any disadvantages of an LLC?
As with any important decision that will affect the future of your business and livelihood, it’s always best to get unbiased advice from a professional tax advisor, but you might want to consider the following points when considering whether to form an LLC:
- They can be more complicated
To set up and run an LLC, there are myriad state regulations to consider, documents to be filed and registered agents to be appointed responsible for receiving legal notices. The range of tax options can further complicate things, and there may be ongoing filing requirements to fulfil such as annual reports. However, when you work with a professional company who will help you with every aspect of this, most of the complicated stuff doesn’t even need to fall within your radar, they will take care of it all for you.
- It can cost more
With state fees applicable and extra fees for ongoing filing, you may find that your administrative costs are greater than if you had chosen sole proprietorship. Again, you will need to talk to a professional who can help you to weigh up the costs with the benefits.
- The level of risk will need to be thoroughly assessed
You should conduct a thorough risk assessment of your business to determine your chances of being sued for physical, financial or emotional harm. The best way to do this is to think of the very worst-case scenarios and think about what the cost of being sued wold do to you and your business. Seek professional help when doing this to ensure that you think of every possible risk and the best ways to address them.
It’s important to remember that an LLC is the best type of business to form if you want to protect your personal assets from creditors and lawsuits. For all other factors related to forming an LLC, seek guidance from a specialist business advisor.