|
You probably started your business because you love what you do, not because you're a fan of intricate laws. Still, as a business owner, you face important legal decisions with some regularity. After all, you probably maintain business insurance to protect you from lawsuits, but what else are you doing to protect your personal assets? Are you considering forming a limited liability company, or LLC, to take advantage of tax benefits? The good news is it's actually pretty easy to form an LLC and this type of business entity offers a number of advantages for entrepreneurs as well as small business owners. Before you jump into the process, here are 5 important things you need to know first. 1. Make sure you understand what an LLC is There are a few types of structures to choose from, including sole proprietorships, partnerships, C or S corporations and LLCs. Of course, each has its own benefits and drawbacks. An LLC is basically a hybrid entity that combines the best of corporations and partnerships. An LLC is by default a pass-through entity, which means income is taxed once it's passed through to individual members, or owners. This compares to a corporation which is subject to double taxation: business income is taxed at the corporate level first and then a second time once it's distributed. 2. Think about the benefits of an LLC An LLC is, above all else, incredibly flexible -- more so than any other business entity. You get to choose virtually everything from management rights and structure to how the LLC will be taxed and how profits are distributed. For this reason alone, an LLC is the ideal choice for most small businesses. When you form an LLC, you can also enjoy the benefits of limited personal liability for owners, which means your personal assets are protected if the business is sued. 3. Don't forget the drawbacks There are some little details you don't want to overlook before you incorporate. If your LLC has a single member, it will automatically be taxed as a sole proprietorship. If you issue a small amount of shares to other people, such as friends or relatives, you can form a real partnership and avoid this. It's important to note here that spouses won't count, however. There are some other things to consider as well, as you can't pay yourself wages as a member of an LLC and each member's share of profits is taxable income, whether or not that person's share of profits is distributed. 4. Types of businesses suited to an LLC An LLC is the best option for most businesses with its wide range of advantages, but this doesn't mean it's best for all businesses. For example, if you plan to take the company public at some point, it's a smarter move to just incorporate as a corporation as converting from an LLC to a corporation in the future may incur hefty taxes. It's also not a good option if you will be financed by venture capital firms because of tax restrictions. 5. Incorporating is easier than you think! Finally, it's easier than most people believe to form an LLC. There are four basic steps you'll take: First, select a name that's available for the LLC, Decide how the LLC will be managed as you can structure it as member-managed with everyone having an equal say or manager-managed, File your Articles of Incorporation with the secretary of state, and Create an operating agreement, which is the foundation of your business. If you think it's time to take the next step and learn how to incorporate a business, visit USA Corporate Services to learn more.
Related Articles -
form an LLC, what is LLC, how to incorporate a business,
|
