Are you thinking of forming your own Limited Liability Company (LLC) in the USA? If you are reading this post, chances are it is on your radar.
However, a wrong move in businesses can set you up for failure. Before you start the process of forming your own LLC, take a step back. Invest some time into learning more about it and understanding the pros and cons.
In this post, we’ll discuss it all. Let’s start with the basics.
What Is an LLC?
LLCs are hybrid entities that have a mix of the features of Corporations and Partnerships. Just like Partnerships, LLCs have a flow-through taxation system. Similarly, this structure borrows its limited liability feature from Corporations.
In an LLC, owners are not referred to as ”shareholders”. Instead, they are called “members”. There is no limit on the number of members that an LLC can have.
Individuals, Corporations, or other LLCs can all be members.
Another important thing to note is that insurance companies, trust companies, and banks cannot be considered as LLCs.
Now that you have a basic understanding of what an LLC is, let’s look at the advantages and disadvantages of this company structure:
Advantages of LLCs
Compared to other company structures, LLCs are easier to form. Plus, it’s relatively inexpensive to form an LLC. It’s a structure that is based on limited liability. So, none of the members are personally liable to pay the LLC’s debts.
Members also have the full autonomy to decide how they want to split their profits. They are not bound by a 50-50 ownership structure.
Another advantage of LLCs is the method by which the tax is calculated. Unlike in Corporations, LLCs do not have a system of double taxation.
This means that for an LLC with a single member, the business’ income is passed on to the tax returns of the individual.
In LLCs that have multiple members, the taxation is passed to each member based on the percentage of their ownership. Additionally, they also have to pay self-employment tax.
LLCs are also easier to maintain. That’s because members are not required to keep a record of their meetings or resolutions.
Disadvantages of LLCs
As mentioned earlier, LLCs are easier to maintain. However, they require you to provide state and federal-level filings. The state filing fees need to be paid for the year during which you set up the LLC and for every year thereafter.
Taking these things into account, forming a Partnership or Sole Proprietorship may seem like a better idea.
In the long run, if you want to have investors or go public, LLCs aren’t the way to go. Forming a Corporation is a better option for a company with investors that wants to go public.
Formation of an LLC: What You Need to Do
Here is how you need to go about the process of forming an LLC:
- Get your LLC Federal EIN (Employer Identification Number)
- File the Articles of Organization with the Secretary of State
- Make an Operating Agreement that clearly outlines all the details regarding the financial and functional framework for the LLC.
- Pay the fees for filing the articles
You can handle the entire process on your own. Alternatively, you can hire a lawyer or a professional filing service to do the work for you.
Want to know more about LLCs?
Check out the infographic below by GovDocFiling.
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.