Have you always wanted to start your own business? It’s easier than you think!
If you have a great idea for a business, but want to ensure you take steps to protect yourself from any personal liability from that business, you can form a limited liability company in no time.
Commonly referred to as an LLC, a limited liability corporation is a business structure that’s largely similar to a sole proprietorship – and its primary advantage is that the owners, or members, aren’t personally responsible for the company’s debts or actions.
Contrary to what you might think, forming an LLC is easy, too. In fact, you can set up an LLC online in many states. Of course, before you form your own LLC, it’s important to understand what you gain from doing so — and to explore other business options to ensure you’ll end up with a business structure that best suits your interests.
LLCs versus Corporations
Is an LLC the optimal structure for your business? Or would your business venture benefit more if it was a C or S corporation. Here are the primary differences between LLCs, C corporations, and S corporations:
LLC
An LLC offers the limited-liability protection of a corporation with the tax structure and flexibility of a partnership. In this case, the company itself isn’t taxed; profits are passed to members, and they’re taxed on their individual tax returns at their personal income tax rates. This option is ideal if you want protection from personal liability but don’t need to raise money from outside investors. This option also provides the most flexibility when it comes to managing the business and handling taxes.
C Corporation
In a C corporation, the business is owned by shareholders. The company — not its officers or shareholders — is liable legally and financially. The main disadvantage of a C corporation is it essentially faces double taxation. Profits are first taxed as income at a rate of up to 35 percent, The Balance¹ reports; when paid to owners, they’re then taxed at the recipients’ personal income tax rates. When paid out as dividends to shareholders, they are taxed at the current dividend rate. While shareholders own the business, decisions are made by an elected board of directors. Officers of the company, including its CEO, handle day-to-day operations.
S Corporation
While S corporations share the same distribution of control among shareholders, officers, and boards of directors as C corps, they also offer some distinct advantages. In particular, owners of S corps can avail themselves of pass-through taxation. Profits and losses from the business are reported on its owners’ tax returns; the business itself isn’t taxed, and there are no corporate tax returns. At the same time, profits are not subject to so-called self-employment taxes, which consist of things like social security and Medicare contributions. Like C Corps, however, S corps are significantly more complicated than LLCs in terms of taxes and management, and they typically only make sense for businesses that generate considerable income.
Know Your State Laws
The process behind establishing an LLC varies from one state to the next. Therefore, you should research the specific steps required wherever your business will be located. Although various aspects of the process vary from state to state, many steps are fairly universal. They include:
Select a name for your LLC: The name of your LLC must be entirely unique from any other business that is operating in your state. You’ll need to file paperwork and pay a name reservation fee.
Appoint a registered agent: Also known as a statutory agent in some areas, all LLCs must have a designated registered agent on file with the state. This individual may or may not be a member of the LLC itself, but they’re responsible for receiving subpoenas, lawsuits, and the like on behalf of the company.
Create an LLC operating agreement: Although not required in all states, it’s in your best interests to prepare an LLC operating agreement while setting up your LLC. This agreement outlines how the business will be operated.
File LLC organization paperwork: In most states, the paperwork needed to establish an LLC is called the articles of organization. These include information like the name and address of the LLC; the name and address of its registered agent; the purpose of the LLC; and the length it will exist if not perpetually.
Obtain certificate: Once your LLC organization paperwork has been filed and approved, you will receive your certificate from the state. You’ll now be able to obtain a tax ID, bank account, and any necessary business licenses for your newly established LLC.
Start Your Application Online
Ready to prepare your very own LLC? Business owners interested in establishing LLCs just need to file paperwork with their states’ Secretary of States to form an official company. However, different agencies handle these matters in different states, so definitely check your state’s specific filing rules and requirements before you begin.
Most states now make setting up an LLC fast and easy, offering online filing to save you time. Once you know the process for your state, head online to see if you can file online. If so, you should be able to complete most of the process that way — which is why it’s generally so much easier than people realize.
Even though it’s fairly simple to set up an LLC, make sure not to rush the process. Do your own research to determine whether or not this type of organization makes sense for your business and find out precisely what your state requires when it comes to getting everything set up and ready to go.
Like anything, it’s always a good idea to be aware of the latest research. We recommend comparing at least 3 or 4 options before making a final decision. Doing a search online is typically the quickest, most thorough way to discover all the pros and cons you need to keep in mind.
