Should you get an LLC for your business
Forming an LLC for your small business and other considerations for overall business structure
A limited liability company (LLC) is a type of business structure that many businesses use when establishing their organization. It treats owners like partners but gives them the choice to be taxed like a corporation. This form of business allows for flexibility in ownership and management. This type of structure is different from a corporation and is often less complex than the requirements of existing as a corporation. Many small businesses choose this designation type because it is less costly, simple to establish, and easy to maintain.
Entrepreneurs and business owners who are looking to protect their personal assets, establish effective business tax structures within their business, and grow their business long-term will benefit from an LLC formation because it protects its owners from personal responsibility for its debts or liabilities.
What is an LLC?
As outlined, an LLC is a type of business entity and legal entity known as a limited liability company. Limited liability is an important aspect to consider when establishing a new business as an LLC. Limited liability means that all LLC owners (LLCs can have one or more owners) have personal liability protection. So, in the case that the LLC cannot complete payments to a vendor, their personal property or personal possessions are protected. Essentially, funds that have been invested directly in the LLC are what the company can use toward business debts.
Another unique aspect of the LLC structure is how business taxes are allocated. For tax purposes, the LLC and the business owners (the managers) are lumped together. Like a sole proprietorship, there is no distinction between the business owner and the organization. As such, business income is reported on income tax returns which can lead to important tax advantages. However, different from sole proprietorship structures, LLC’s are still able to provide limited liability protection.
What can an LLC do for you?
The most important aspect of forming an LLC is giving your business its own identity. Assets, funds, and anything associated with the LLC belongs to the LLC – not to the business owner. As discussed, this helps business owners protect their own assets and personal property. Additionally, when establishing an LLC, small business owners are taking critical steps in being able to secure a business license to run their operations.
Here are the main advantages of operating an LLC:
- Formalized business structure. Having an LLC provides enhanced structure for business operations, including outlines of how decisions are made, allocation of profits, and establishing the roles of business partners.
- Taxation options. Usually, LLCs are taxed as a sole proprietorship; however, LLCs can also choose other tax structures such as an S-corporation (S-corp) or C-corporation (C-corp). The ability to choose how you want your LLC to be taxed is a major tax benefit and draw for business leaders. The profits are taxed through the personal income taxes of the members, not as company income. This avoids the double taxation that occurs with certain corporate structures.
- Simplicity. When establishing an LLC during startup, the business owner is not required to elect officers and directors or have board meetings. Instead, the documentation and filings are much more streamlined and require a lot less paperwork and structures to file for corporations.
- Flexibility in ownership. LLCs can have one member or multiple members who lead the organization and hold ownership. This allows for more fluidity when changes happen at the organization without as much of a headache with other business structures.
- Options for management. With flexibility in who owns the LLC, there is also flexibility in what management looks like at any given LLC. There may be one designated operator or multiple people who hold varying responsibilities. This can be up to the discretion of the members and LLC owners (for multi-member LLCs) upon filing for the LLC. If the LLC is a single-member LLC, then management approaches are clear and direct from the beginning.
- Credibility. When consumers or potential customers see that your business is an LLC, they can be reassured that you are operating a legitimate enterprise. You have an official name, you file articles of organization, and you maintain an employer identification number. Moreover, you have ownership of your proprietary name for the long haul since most states don’t allow the same proprietary name and legal entity name within the same business type.
What can’t an LLC do for you?
As with any business entity, there are some limitations with the LLC structure. The main considerations for what an LLC can’t do for you are as follows:
- No stock options. If you are seeking a way to have investors in your business idea, registering as an LLC may not be the best option for you. LLCs cannot issue stock and thus investors are going to strongly prefer to invest in corporations instead of LLC organizations. Unlike a corporation, an LLC can't issue stock, and this complicates matters if you want to take on investors. That’s why many investors prefer corporations over LLCs.
- Limitations in some states. Depending on the state in which you live, there may be some limitations for your business type and being able to operate as an LLC. For example, some states note that dentist or architecture businesses cannot exist as an LLC and will have to choose a different business type, such as a professional corporation. Depending on your state, you may choose to form a professional limited liability company, professional corporation, or professional limited liability partnership instead.
- Limitations with liability protection. While there are major benefits to having personal liability protection, especially from creditors, there are limitations. For example, if you can’t guarantee a loan, personal assets may not be protected in the same way. Or, if your business is destroyed by a natural disaster, you may risk being able to have protection over the actual business property. It’s important to look closely at what liability coverage offers and how you can best be protected.
- Fees. Even though the LLC option is more affordable than other business types, there are still important operating costs to be aware of. For example, you will have to pay filing fees, annual fees, and taxes. You may also need to consult for legal support in the creation of an LLC operating agreement so that a clear pathway for the governing of your LLC is made.
Do you have to have an LLC?
While there are major advantages to operating an LLC, it is not necessarily required or the best fit for all business owners. When considering forming an LLC, you should consider several important aspects of your business operation.
- Consider if you will have business partners and want to seek outside investors for ongoing financial stability and growth.
- Consider your financial contracts or relationships that may impact the financial status of your LLC.
- Consider your capacity to stay up to date with important business documentation, including annual reports.
- Consider if you want to pay additional fees and expenses in running your LLC. You may also want to explore if you’d like to open a separate LLC bank account to keep your business funds separate from personal assets.
- Consider what your insurance needs may be to limit your business liability.
The bottom line is that you don’t have to have an LLC to run a business; however, for many small business owners, it is the best entity fit. Continue to assess your needs and move forward when you know that an LLC designation will be the best for your operation.
When should you form an LLC?
When you are ready to take your business idea or structure to the next level, an LLC may be the next best step. Moreover, if you are ready to protect your assets, prepared to pay state filing fees, and feel that the benefits of an LLC are a match for you, filing for an LLC is your next move.
As the registered agent, you will have full access of running your business, completing filings through the office of the secretary of state, and officially establishing your business name. The IRS will consider your business as a real and legal entity. From there, your business is ready to grow, expand, and take off.
Are you looking to learn more about how an LLC entity could be the right match for your business idea? Are you ready to take your business entity to the next level? Are you excited to incorporate more structure into your business?
Heartland is ready to help.
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