There’s no one-size-fits-all business structure.
However, as a new entrepreneur, it’s worth considering the potential benefits of registering as a limited liability company (LLC).
Let’s take a closer look at some benefits you could look forward to if you register your new business as an LLC.
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1. Limited liability protection for entrepreneurs
One of an LLC’s biggest advantages is its limited liability protection.
As a new business owner, you’re no stranger to financial risks (especially if you fund your startup with personal savings).
Forming an LLC creates a separate legal entity. This means your personal assets, like your home, car, and savings, may be protected from the business’s debts and lawsuits. If the business fails or faces legal issues, your personal liability is typically limited to the amount you’ve invested in the company.
Let’s say you’ve poured thousands into your new startup, and things go south. Without an LLC, your personal finances are at risk.
With an LLC, however, creditors (usually) can’t go after your personal assets. (See our legal disclaimer at the end of the article for more information.)
2. Pass-through taxation and tax flexibility
Taxes can be complicated for a new business owner, but an LLC may offer you some relief.
Unlike corporations that face double taxation (once on profits and again on dividends), LLCs benefit from pass-through taxation.
This means your company’s profits are only taxed once — on your personal tax return. This alone can reduce your tax burden and help you keep more of your hard-earned profits.
For new entrepreneurs, this is especially important. If you’ve transitioned from a sole proprietorship, where you’re used to reporting income directly, an LLC can help you keep that simplicity while offering legal protection.
You can also have your LLC taxed as an S-corp or C-corp. Depending on your business’s growth stage, this might offer you more flexibility and potential tax savings.
3. Simple and flexible management
LLCs are known for their simple and flexible management structure.
(Unlike corporations, which require boards of directors and annual meetings, LLCs let you decide how you want to run the show.)
You can opt for a member-managed LLC, where owners handle the day-to-day operations. Or choose a manager-managed structure, where a designated manager takes the reins.
As a new business owner, this flexibility can help you scale.
For instance, you may want to keep things simple early on with a member-managed setup. As your business grows, you can easily switch it to a manager-managed structure without facing the red tape that often comes with more complex business types. This flexibility in your organization structure allows for smoother transitions and adaptability as your business evolves.
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4. Easy to form and maintain
Starting an LLC is usually straightforward, which is great for first-time entrepreneurs.
In most states, forming an LLC involves filing a few legal documents, such as the Articles of Organization, and paying a modest filing fee. For example, a New York LLC costs between $200 and $250 to file.
Some other fees might include:
- Registered agent service: Around $100 to $300 per year if you’re using a third-party service.
- Publication fees: These are required in some states, like New York, and can range from $40 to $2,000, depending on the location.
- Operating agreement: Legal counsel fees may apply if drafted professionally (this could cost around $200 to up to $1,000).
- Annual report fees: These are often required and usually range from $20 to $500 per year.
- Business licenses/permits: These are local and industry-specific. They vary by location and business type.
- Employer Identification Number (EIN): This costs nothing if you file directly with the IRS, but third-party services may charge you around $50 to $100.
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Corporations Today decodes the complexities of the Corporate Transparency Act, providing vital services to keep your business compliant and in good standing. We also offer fast, friendly, dependable service for incorporation filings in any state, specializing in Limited Liability Companies (LLCs), C-Corporations, and S-Corporations.
We earn a commission if you make a purchase, at no additional cost to you.
5. Perpetual existence: Business continuity
Planning for the future is critical as a new business owner and an LLC offers “perpetual existence,” so you can do just that.
This means your business can continue to operate even if one of your owners leaves, can no longer work, or passes away. Your LLC will exist as a “separate entity” so your business can continue to run and expand.
An operating agreement is an internal document that explains how your business works. It helps decide what happens to ownership shares if you leave so your business can continue without disruption.
Having an LLC can also help you attract investors or bring in new partners.
Unlike a limited partnership, where transferring ownership can be complex, an LLC lets you transfer financial rights without disrupting business operations. More on this in a bit.
6. Asset and intellectual property protection
As a new entrepreneur, safeguarding your brand, trademarks, and other creative works should be a top priority.
By holding Intellectual Property (IP) rights in an LLC, you can create a separate entity that may shield these “intangible assets” from personal or business-related liability.
For example, if you’re starting a tech startup, your IP — like software code or branding — is likely your most valuable asset. Holding IP in an LLC may help separate and protect these assets from other business liabilities.
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7. Attracting investors and international growth
If you’re looking to attract venture capital or angel investors, forming an LLC may help position your business as an attractive choice. Gaining coaching insights on how to present your LLC’s potential can be crucial in convincing venture capitalists and angel investors of your business’s long-term viability.
LLCs simplify organizing investments, making it easier to manage how money is invested in your business.
They also protect everyone involved — investors and the business — from financial and legal risks by separating their liabilities from personal assets. Plus, the pass-through taxation and flexible ownership structure mean that investors can avoid the headaches of corporate taxation (while still benefiting from your business growth).
8. Exit strategies for new entrepreneurs
As an entrepreneur, planning your exit strategy is just as important as planning your entry into business.
LLCs offer flexibility in ownership transfers and make it easy to sell or transition the company.
Whether passing the business to a new owner or dissolving the LLC, having a clear operating agreement in place simplifies the process.
This flexibility can help you scale your business and eventually sell it without many legal hurdles.
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Wrapping up
Forming an LLC might be the best move for a new entrepreneur. An LLC could offer the solid foundation you’ve been looking for, with potential benefits like limited liability protection, tax advantages, straightforward management, and asset protection.
Having an LLC may also help you attract investors and allow you to scale your business with the intent to sell it in the future.
If you’re preparing to launch your startup soon, consider whether forming an LLC aligns with your goals. It might be smart to help build and protect your business for the long haul.
FAQs
1. How long does it take to form an LLC?
Forming an LLC takes a few business days, depending on your state’s filing procedures.
2. What’s the difference between an LLC and a sole proprietorship?
An LLC may offer limited liability protection for your personal assets, whereas a sole proprietorship typically doesn’t.
3. What are the costs involved in forming an LLC?
Filing fees vary by state. For instance, New York LLCs cost around $200 to $250 for filing.
Legal Disclaimer: Regardless of what entity you choose, you may still be held personally liable in the case of a business lawsuit. Even if you choose an LLC, consider consulting with a registered agent before choosing your business entity.
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