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Entering Your Entrepreneur Era: Limited Liability Companies

Whether planning your business on your own or working with other people to bring a new business to life, you’ve probably heard of a limited liability company (LLC). This is a common business structure where your business is considered a legal entity, and owners are referred to as “members.” Membership is generally unrestricted in most states, meaning a member can be an individual, a corporation, a foreign entity and even another LLC. Some of the most well-known examples of limited liability companies include Google LLC, YouTube LLC and Dunkin’ Donuts LLC. Though, the most important distinction between a limited liability company and other business structures is the legal separation between an LLC and its members. This separation means that members’ personal assets are not mixed with business affairs, and they will receive liability protection if the business fails or faces legal action.

The Requirements

After deciding on a business name, you and any additional members will need to register the business with your Secretary of State. This process and associated regulations vary by state, and most states require businesses to register annually. You will generally need to submit Articles of Organization and apply for an employer identification number (EIN). The Articles of Organization are legal documents detailing the basic information about the LLC, the personal information of the LLC members, the name of the individual designated to receive legal and government correspondence on the LLC’s behalf (registered agent), and the LLC’s statement of purpose. While not required by the state, it’s also strongly advised to create an operating agreement for your LLC. This document serves as an internal contract between members, and it will reflect the official roles and duties of each person as well as how profits will be distributed.

The Benefits

• Credit access: Because registration of LLCs requires more official paperwork and detailed organization, they are often seen by lenders as lower risk and may find business credit more accessible.
• Flexible taxation: Classified as pass-through entities by the IRS, LLCs pass their income to members, who report it on their individual tax returns and sometimes benefit from qualified business income deduction. LLCs also have the flexibility to be taxed as a sole proprietorship, a partnership, or a corporation, but you should consult a tax professional to determine which structure would suit your business best.
• Asset protection: As the LLC is a legal entity registered with your state, your personal assets receive liability protection from any business debt or lawsuits against the business.
• Shared workload: An LLC can be run by its members to varying degrees, or you can hire a manager to handle everyday affairs.

The Drawbacks

• Required paperwork: When a member joins or leaves an LLC, some states may require the LLC to be dissolved and re-formed with new membership — unless there's already an agreement in place within the LLC for buying, selling and transferring ownership.
• Income implications: Members of LLCs are considered self-employed and subject to self-employment tax contributions. Furthermore, since you are taxed at the individual level for profits made through the LLC, the LLC could push you into a higher tax bracket and lead to higher tax payments.
• Banking separation: To preserve the legal separation between the LLC and its members, you will need to create a separate business account to manage business finances.

As you consider the business structure that suits you best, you may also benefit from seeking professional advice. Consulting other business owners, as well as attorneys or certified public accountants with small business experience, may provide you with helpful insights for your own business.

Sources:

https://www.sba.gov/business-guide/launch-your-business/choose-business-structure

https://www.uschamber.com/co/start/strategy/sole-proprietorship-vs-llc

https://www.investopedia.com/terms/l/llc.asp