As you launch a new business, you’re undoubtedly excited about assembling a team, building a customer base, and displaying your incredible products and services to the world. You may have less enthusiasm about the legal elements of entrepreneurship, including decisions over your company’s legal structure.
And yet, this is an important decision that could have foundational implications for the entire life of your company. The business structure you choose may determine your personal liability protections, your tax rate, even the way in which managerial responsibilities are distributed between you and your partners.
While it’s important to explore all the options, including Sole Proprietorship, Partnership, and Corporation, it’s ultimately worth noting the broad appeal of the Limited Liability Company, or LLC. Among entrepreneurs and small business owners across the country, the LLC format is the most popular option by far. And there are a number of reasons for that.
So what is an LLC, exactly? This legal structure is distinct because it creates a new legal entity, providing a clear line of delineation between the business and the business owner. This isn’t the case with, say, a Sole Proprietorship, where the business and the owner are for all intents and purposes the same entity.
In other words, when you start an LLC, you can maintain a legal distinction between your personal resources, assets, and liabilities, and the ones that belong to the company. This is important should you ever find yourself on the receiving end of a lawsuit; while your LLC assets may be seized, your personal assets cannot be.
With that said, the LLC also provides a number of benefits (including tax flexibility and ease of administration) that make it a simpler option than the Corporation.
What are those benefits, exactly? Here are some of the primary LLC advantages for entrepreneurs to consider.
Any time you launch a business, you take on some level of risk. One of the great benefits of the LLC structure is that it helps you mitigate that risk, specifically through its personal liability protections.
Again, the LLC format allows you to maintain a distinction between personal and business assets, and between personal and business liabilities. What this means is that, in most cases, lawsuits and creditors cannot come after your personal bank account, your house, etc. This provides entrepreneurs with a certain peace of mind.
Another reason for the popularity of the LLC structure is tax flexibility.
When you’re launching a new business, you may feel a certain wariness about paying the corporate tax rate. Luckily, you don’t have to, at least not if you opt for the LLC structure. With an LLC, the default IRS reporting option is the “pass through,” meaning you’ll simply declare profits on your personal income tax return and pay your normal tax rate.
With that said, the LLC also allows you to opt into the corporate tax rate, should you so desire. This level of flexibility is something that many entrepreneurs appreciate.
The LLC structure also offers some wiggle room with regard to management. Specifically, each LLC founder can establish their own Articles of Operation, detailing how managerial duties are distributed between themself and their partner(s), if any.
The Articles of Operation may also outline the protocols the business will take for recruiting a new partner, or relieving a partner of their duties.
Simply put, the LLC structure covers entrepreneurs who want to run the show all by themself, entrepreneurs who want to work with a management team, entrepreneurs who want to bring in partners, and entrepreneurs who aren’t yet sure how they wish to approach their management structure.
Something else to consider is that first-time business owners often have little experience handling the legal formation of a company, and may prefer a structure that’s pretty light on administration.
The LLC more than fits the bill. You’ll need to draft those Articles of Organization and submit them to your state government, and you’ll need to pay a nominal filing fee.
From there, you’ll likely be required to pay a small LLC fee annually, and in some states you may have to submit a very brief report. These tasks pale in comparison to the amount of reporting required for a Corporation.
Notably, most states require LLCs to have a Registered Agent, someone with a local mailing address who can receive official legal and tax documents on the company’s behalf.
A common question: Should I be my own Registered Agent for an LLC? The short answer is that this is acceptable in some states but many will require you to hire someone external to the company itself. And, if you register an Foreign LLC (e.g., in a state other than the one you live and do business in), having an Agent with a local mailing address is mandatory.
Even with all of this said, establishing an LLC is pretty simple and straightforward, and maintaining your legal status requires only the most minimal effort. Certainly, it’s an easier option than handling the rigors of a Corporation.
For entrepreneurs, there are always a lot of big, important decisions to make. Foremost among them is the decision about what legal structure to choose, a choice that can have wide-ranging effects on your personal and business finances for a long time to come.
Though there may be instances where an entrepreneur prefers the ease of the Sole Proprietorship, the personal liability protections make the LLC more versatile and more useful overall. For a majority of entrepreneurs, the LLC structure is the best way to go.
With any questions about choosing the right legal structure, don’t hesitate to seek counsel from a business attorney, a tax preparation expert, or even a business coach, who may be able to walk you through further ins and outs of the LLC format.