Many small business owners feel their company is too small to bother with incorporation. Unfortunately, this leaves them open to a multitude of problems that could be avoided with a little paperwork and a small fee. An LLC is often the compromise between forming a corporation and working unprotected.
Benefits To Making Your Small Business An LLC
An LLC (Limited Liability Corporation) has a number of advantages -- one of the most important being that it protects the owners from many of the company's liabilities. In most cases, if a client or vendor sues the company, the LLC prevents them from getting to the owner's personal assets. The most notable exception is when the owners engage in illegal activities, but it does protect personal assets from judgments for most lawsuits, such as property damage done by a worker.
Another advantage of forming an LLC is pass-through taxation. Essentially, this means all profits and losses of the business go directly to the owners. You can continue to file the profits and losses on your personal income tax forms, without the complexity of filing business taxes. Also, you're taxed at the personal level, not the business level, which may be lower.
In an LLC, there is less record-keeping involved. This makes maintaining your financial records simpler whether you manage your own bookkeeping or if you're using outsourced bookkeeping services. An LLC also allows the owners of the business to share in the profits in whatever way they determine among themselves.
Who Can Form An LLC?
An LLC can be formed by a sole proprietor or a group of owners. In most states, you simply have to file a form with the names and contact information of the owners. Some states have other requirements, such as drafting an operating agreement, which details things like the percentages of ownership, what rights each owner has, what role each owner plays in the business and the responsibilities of each owner. Even if your state does not require an operating agreement, it's a good idea to have one for legal purposes. The fees for an LLC vary by state, ranging from about $30 to over $200.
After the LLC is formed, you will need to keep it current according to your state's laws. Some states require annual statements and reports, while others have no yearly requirements. If one of the owners leaves the partnership, the LLC must be amended through the state or a new LLC must be formed. Keep in mind that an LLC is not the same as a business license. You will still have to get all of the necessary licenses from the city, county,and state to maintain your LLC status.
Please keep in mind you should consult a professional before determining which legal entity your business should take on and AccountingDepartment.com does not provide legal advice.
