One of the big questions new entrepreneurs have when starting a business is what kind of corporate entity they should choose – or if they should just stick to a sole proprietorship. Forming an LLC is one of the most popular choices for small business owners because it is relatively easy to do and offers multiple benefits. If you are considering forming an LLC, the following questions and answers will give you a better idea of whether an LLC is the right choice for your needs.
Is an LLC Right For Your Business?
1. Are You Worried About Personal Liability?
One of the biggest reasons business owners choose to form an LLC is because they want to maintain a “corporate veil” between their personal assets and the assets of their LLC. When you form an LLC, you are creating a legal entity that can own assets and owe debts. If something goes wrong – like your LLC loses a lawsuit – the court can usually only go after the assets of the LLC. In contrast, if you are a sole proprietor and you lose a lawsuit, the court could decide to take some or all of your personal assets to pay the damages owed by the LLC.
If you are worried about protecting your personal assets, forming an LLC is one of the easiest ways to create a corporate veil. LLCs are simpler to form and maintain than other corporate entities while still establishing a barrier between your personal assets and the assets of your business.
2. Do You Want To Lessen The Chances Your Business Will Be Audited?
Forming an LLC is not a guarantee that your business will not be audited – you can always be audited, even if your taxes were done perfectly and you paid everything that you owed. But you can diminish the chances of your business being flagged if you avoid mixing personal and business finances, and forming an LLC can make that process easier and significantly decrease the chance you will be audited. That’s because when you do your taxes, as long as you have kept your personal and business finances separate by using a business bank account, you can easily point to the expenses that were for business.
If the IRS looks over your deductions and you have maintained this proper corporate financing structure, you are far less likely to throw up any flags on their end. That means less chance of getting audited and more peace of mind.
3. Are You Looking For An Easy Balance Between Corporate Protections And Simple Tax Structures?
Taxes for corporations can get complicated really fast – which is one of the big drawbacks to forming most types of corporations for small business owners. But LLCs are designed differently. They allow you to take advantage of pass-through taxation, where the profits go straight to you and any other owners and avoid being taxed as corporate profits. They only get taxed on the personal level at whatever income bracket you happen to be in.
Pass-through taxation is the go-to choice for most LLC owners (you have other tax options if you want them) because it simplifies the tax filing process. You can do your taxes on an individual level and not have to get into the complexities of corporate tax returns. And if your LLC happens to lose money, you can make your tax burden lower on your tax return by claiming a loss on your business.
4. Do You Want To Form A Corporation, But You Don’t Want To Be Limited In How You Manage That Corporation?
Most corporate entities have to be managed in a very specific way, but LLCs are not designed this way. They let you set things up exactly as you please and run your business according to what you think is best for you and any other members. You and the other members can manage the business if you want, but you don’ have to. You can bring in others that are not members and take advantage of their expertise to help with the management of your operation. Keep in mind that your LLC will most likely default to member management in the majority of states unless you say differently.
5. Do You Want To Form A Corporate Entity But Want To Keep The Process As Simple As Possible?
One of the great things about forming an LLC is how easy the process can be. You can take care of all the different steps on your own or you can hire an LLC formation service to do all the paperwork and take care of the arrangements. It all depends on how much time and effort you want to put in. Some states have filing fees as low as $50 and some services offer to take care of everything for even less on top of the state formation fees. That means you can form an LLC with minimal cost and minimal effort – while still taking advantage of everything an LLC offers.
6. Are You Willing To File Annually And Pay The Various Fees To Maintain An Llc In Order To Get The Advantages Such A Corporate Structure Offers?
LLCs do require more upkeep than sole proprietorships. While you get plenty of advantages for forming an LLC, you typically need to file paperwork annually with the state to maintain your status with the Secretary of State. The filing fees are not usually very high, but they are fees that you will need to pay each year or each filing period to stay in good standing with the state. Most business owners do not balk at such minor inconveniences to maintain the corporate veil and get the other benefits of forming an LLC – but if you really don’t need these benefits then the extra hassle may not be worth it.
You can find out more about your state’s filing rules and fees by visiting the website of the Secretary of State.