Essential LLC Facts You Need to Know as a Small Business Owner
A limited liability company (LLC) is one of the most popular legal entity choices for budding entrepreneurs and small business owners. Why? Because it offers immense flexibility and requires minimal documentation.
However, each state has its own regulations when it comes to forming and operating an LLC. And you should check the regulations for your state with the Secretary of the State.
While LLCs are popular among business owners, is forming an LLC the right decision for your venture? Only you are the right person to decide this.
We’re going to list a few essential facts you need to know about LLCs. These facts will help you make an informed decision.
LLCs Are Popular
When setting up your business, you are likely to get confused by the number of options you have in terms of legal entities. But limited liability companies (LLCs) have become a preferred business structure due to their simplicity and flexibility.
As of 2019, Florida alone had over 310K domestic LLCs.
LLCs Are Easy to Form and Maintain
LLCs are inexpensive and easy to form. All 50 states in the U.S. allow you to form an LLC by filing Articles of Organization with the Secretary of State. The exact fees and administrative steps may vary from state to state.
There is no restriction on the maximum number of owners an LLC can have. You can either form a single-member LLC on your own or partner with other people to form a multi-member LLC.
You need to choose a unique name for your LLC as there can be just one active LLC with the name within the same state.
You should also create an LLC Operating Agreement that will outline the financial and functional decisions of your business. It’s not required by all states but recommended to maintain transparency and avoid disputes.
LLCs have minimal compliance requirements compared to corporations. You have to deal with fewer yearly and ongoing filing and reporting requirements with the Secretary of State when you establish a limited liability company.
Forming an LLC Protects Your Personal Assets
LLCs offer personal asset protection.
What does this mean for you?
As an LLC member, you are not held liable for debts taken on by the limited liability company. All of your personal assets such as your home, car, bank accounts, and other investments are safe from the company’s debts and liabilities. Lenders and creditors can’t pursue your personal assets.
“Limited” liability in general means that the liability of a business owner is limited to what the owner has invested in the business, and not their personal assets outside of the business.
But “Limited liability” does not mean “no liability.” Business owners can be held liable in cases such as fraud, misuse of funds, or criminal activity.
Finding Investors for Your LLC Can Be Difficult
An LLC is not the ideal business structure to go public or get investors.
If you want to get capital investment from the outside, you should choose to form a corporation instead. Why? Because a corporation allows you to issue company shares and protect investors from liability.
Profit-Sharing is Easy
LLCs allow you to select different forms of profit distribution. It is not necessary to divide the profits equally among all members.
In fact, if one member has invested 70% and the other one has invested 30%, by default, the profits will be shared in the same proportion.
However, you can also choose another profit distribution model too, according to your unique business needs.
LLCs Offer Pass-Through Taxation
LLCs generally do not pay taxes at the corporate level.
The profits and losses of an LLC are passed on to the members of the LLC, who then report the earnings on their personal income tax returns. On the other hand, forming a corporation leads to double taxation, which is one of the major disadvantages of choosing that business structure.
Now that you know what forming an LLC brings to the table, you’re likely to make the right decision for your business.
Do you want more information about LLCs? Check out the infographic below by GovDocFiling to learn more about what an LLC is, its advantages and disadvantages, and the steps involved in LLC formation.