Starting a new business is always inspiring. It’s exciting to be the one in charge of your own destiny, setting goals and making decisions without having someone else looking over your shoulder telling you what to do. You are responsible for every success or failure that comes about because of the choices you make. And it can be very fulfilling when something goes right, even if it was hard work and not luck. But starting a new business also involve legal and financial expects and LLC is probably the main one. In this article we will cover:
You'll also learn about some of the most crucial words and phrases you should be familiar with, as well as go over some other terms that are important to know as an owner of an LLC.
What is an LLC?
An LLC is a legal entity that operates similarly to a corporation in many ways but also has some key differences. An LLC can be defined as a body with legal personality separate from the individual rights of the owner(s).
LLC stands for a "Limited Liability Company" as the name suggests it offers a "Limited Liability protection,” this is a legal business structure that allows an individual business owner, or two or more owners as the case may be, to own and operate a business while protecting the personal assets of all the owners. An LLC have a lot of benefits and can be formed for multiple purposes for example to hold real estate, vehicles, boats, aircraft, machinery, and other physical assets. LLCs are extremely popular among investors because they give the same limited liability as a corporation, but they're simpler and less expensive to start and operate.
Who need an LLC?
Any person looking to start a business or already operate one as a single proprietor should consider creating an LLC. LLCs may be used for any sort of business, from sole proprietorships to enterprises with many co-owners. Rentals and commercial properties are frequently owned using LLCs.
Benefits of an LLC?
LLCs are the most popular business entity among small business owners because they are simpler and more flexible than other business structures, and offer two main benefits:
Personal Asset protection
The main reason behind forming an LLC is protecting business owners and their personal assets from the business liabilities and business debts. LLC`s owner`s personal assets include all of a owner`s asset , such as their home, other real estate, bank and retirement accounts, vehicles, family heirlooms, jewelry, etc. Personal liability is a big concern among business owners and a legal entity can surly provide protection for owners personal assets.
Unfortunately, many business can reach a struggling point at times but If a business undergoes a real hardship, or a legal dispute arises and a business is sued and the business finances are insufficient to cover the debt or reach a settlement with the litigating party, creditors can only pursue the assets of the LLC to settle the debts and liabilities. Because the owners have no personal responsibility and their personal assets are kept separate from the company's assets, their belongings will not be harmed in any way. The business assets, on the other hand, will be affected, and only the LLC's resources will be used to repay its LLC's debts.
Pass through taxation
An LLC also called a disregarded entity, it's one of the least complex entity structures and provides tax simplicity while allowing Limited Liability protection. Most of the Business entities in the united states are Passed through entities. Actually, more than 90% of them. Pass through taxation means that an LLC pays no taxes on the income it generates as an entity by itself, unlike corporations that faces double taxation. All the LLC's income including all credits and all deductions from the business are “passed-through” to the LLC owners, and the owners of the LLC pay the taxes on the business income on their own personal tax returns and at their individual income tax rates. Pass through taxation as the name suggests for federal tax purposes the tax responsibility is being passed to the ownership.
Another advantage of establishing an LLC is how profit taking is handled. LLCs have the advantage of distributing profits among its members whenever and however they see fit. Please keep in mind that as pass through taxation entity you will pay the Taxes on th LLC income on your personal tax return whether you distributed the LLC's profits or not the llc owners pays for the profits of the limited liability company llc. In contrast, a C corporation pays taxes on the profits earned by the entity, but the ownership will only be charged with income taxes on the actual amount distributed to them.
Disadvantages of an LLC?
There are mostly 2 main disadvantages for owning an LLC:
There are formation fees and annual state fees that are assessed, and these can add up over time. In some cases, it may be more expensive to operate as an LLC than to operate as a sole proprietor or have a partnership
Raising money from investors:
LLCs are not ideal for entrepreneurs searching for outside investment. This is especially true if you're seeking venture capital funding, which typically only goes to corporations. Outside investors prefer corporations since stock may be issued in exchange for money invested by investors. Outside investors can invest in LLCs and acquire LLC ownership interests, but this may be more difficult than with corporations.
How to start an LLC?
With BusinessRegistration, it is very easy. You only need to fill up our form and we will take care of it. We will form your LLC for free; you will only have to pay for the state fees. BusinessRegistration will not keep any of those fees; they will be paid to the relevant government agencies in order to form your LLC.
More terms you should be familiar with :
Articles of organization
Once you form an LLC you will receive the Articles of organization this is a document that provides the members of the Limited liability company a legal and binding statues. The Articles of organization includes information such as the name of the LLC and the name of the LLC owners, nature of business of the entity, who has been granted membership, physical address where the business will operate from, and more.
The owners of an LLC are referred to as LLC members, and an LLC can have one owner (a single-member LLC or sole proprietor), or multiple owners (a multiple member LLC). An LLC's manager can also be one of the firm's members, and if you pick to run the LLC, you'll be referred to as member managed. If the manager of the LLC is not a member, he or she will simply be known as Manager and will be in charge of the day-to-day operations of the limited liability company LLC.
An operating agreement is a document that sets out the rights and responsibilities of the members and the LLC management of a limited liability company including voting power and distribution of the LLC's profits and losses.
The provision of an LLC operating agreement will cover topics like ownership if there are only one member or multi member if there are more than one owner, the management, members protection, voting rights, distribution of the LLC's profits, the way notices should be served to the multiple members of the LLC. The agreement will specify who has the authority to manage the business bank accounts, who can apply for a business loans or who will be the registered agent for the LLC.
We provide a pre-written LLC operating agreement to our clients that we believe will cover the most essential topics, but we always encourage them to seek legal counsel when making those sorts of decisions.
A registered agent is a person or an entity who is responsible for receiving any legal documentation for the LLC. A registered agent is required by state law to be accessible during business hours in order to accept any legal documents on behalf of your LLC. LLC rules differ depending on whether or not a registered agent is needed by a particular state and whether it is a foreign LLC or domestic LLC. When there is a legal case, the courts need that the defendant be handed his or her papers in person so that he or she understands exactly what will happen and when important deadlines will expire.
LLCs in contrast to a corporation are more simpler and do not have to elect a board of directors or hold annual board meetings. They also do not have to keep a record of any of their operational activities plans meetings or document any of their strategic business meetings. But is is recommended to keep some kind of record of important decisions made for your own record or just not to forgot the timeline of events.
Choosing Tax statues
LLCs may choose how their small businesses want to be taxed by the IRS, also known as the Internal Revenue Service. for tax purposes the two business structure choices differ in two significant ways :
S corporation: This means that your limited liability company will get the pass through tax treatment and will be treated as pass through entity. In this case the limited liability company will not pay taxes whether the ownership will pay the taxes on their personal tax return at their tax rate.
C Corporation: in this particular business structure the Limited liability company profits will be taxed on the corporation level and than again on the personal income tax returns of the ownership as distributed. This is also called a double taxation and many small businesses trying to avoid those by choosing the s corporation classification for their llc taxes.
After you understand what an LLC is and how to create one, the next step is to establish a clear strategy for taking action. Many limited liability companies take personal asset protection for granted and they don't have a solid plan in place for taking actions because they are unaware of the consequences that may hit them when less expected. You should consider the following to be able to operate a professional LLC:
Business bank account:
Opening a business account for your business entity will ensure that your personal bank account is separated from your business one this will help you to avoid professional malpractice claims like commingling. A court may decide to pierce your corporate veil and the liability protection given to the llc members will be compromised exposing them to personal liability.
This is made crystal clear in the statement: Keep everything separate. What is an LLC? It's not you; it's your company. Business activity should be handled on the business entity level. Your business serves itself not you, everything payed by the business should be for the business. Your business do not need new shoes though the business employees may need one.
Keep documentation about all the transaction in your business you should be able to explain every transaction and as time goes by you may forgot so using some kind of accounting program can help you do just that. Many limited liability companies choose to use easy to operate programs like QuickBooks.
A unique number given by the IRS for Federal tax purposes. You will not be able to open a business bank account without an EIN number nor you will be able to hire employees, take a business loan will be much more challenging as bank use EIN to check your business entity credit history.
It is recommended to look for legal advice when you're facing challenges. Once you find an attorney, they should be able to help you figure out what to do and draw up the appropriate plan of action. Don't hesitate to ask questions It is advised to look for a legal advice about challenges you know littlie about as a good advice can save you lots of money and waisted time.
To establish your own legal entity for your business is a wise decision, you can be a single member llc and the only business owner in a sole proprietorship or you can have a multi member llc with your partners whatever the case may be this is a great start for small businesses to enjoy the benefits of a corporation while taking advantage of the taxation choices. Grow your business without being personally liable for the business debts what else can you ask for?