5 Things You Should Know Before You Establish an LLC

One of the things that you may face when you are establishing a business is starting a limited liability company (LLC). An LLC presents a lot of advantages to a business, which is why more entrepreneurs are considering having them. However, since an LLC is a legal entity, you need to be careful about any misconceptions that you may have about it. These are five of the most important things that you should do and know about limited liability companies:

Understand what LLCs are

LLCs have been described as a mix of partnerships and corporations. It is a separate legal entity, which means that you can open a bank account, request for a tax identification number and operate as a business under its name.

You may ask what the "limited liability" in LLCs means. It actually refers to the owners' minimal answerability with regards to the financial matters of the company. This results in the owners usually not becoming personally liable if the LLC goes under and files for bankruptcy.

LLCs are also not corporations, though they share some similarities. Corporations generally need more paperwork and complicated hierarchy and bureaucracy.

It has become one of the go-to business structures for entrepreneurs because it is arguably the least complex of all. There is also a pass-through tax arrangement, which means there is no need for corporate tax return filings. The owners will instead be the ones reporting on their share of the profit through their individual returns.

Take advantage of its structure

One of the reasons why entrepreneurs like LLCs is because of the flexibility it offers. They are especially perfect for smaller businesses and companies as it allows for more freedom in many aspects of the operations. LLCs can decide on how profits are distributed and how taxes will be done as long as it is within the law.

LLCs are also advantageous as its structure is best for expansion and growth of a business. Small companies and businesses are also more credible to investors, lenders and partners, if they are an LLC.

Do not forget the structure's disadvantages

While LLCs offer a lot of great benefits, they also have their share of small disadvantages. For example, if you are the only owner, the LLC is automatically considered a sole proprietorship for tax purposes.

Establishing an LLC can also be confusing for some people as regulation differs across states. If you are considering an LLC for your business, you will really need a lawyer who has an expertise in relevant state and federal LLC-related legislation.

LLCs are versatile but not perfect

LLCs are a great type of business structure for those who are planning to maintain a small to medium-sized operation. But if you are planning to take your company public in the future, it is not ideal. The idea of making an LLC into a corporation is complex and can incite a taxable event.

LLCs are also not the best for businesses that want to raise rounds of capital from venture capital firms. This is due to some tax restrictions on the side of the venture capitalists.

Establishing an LLC Might Be Complex For You

If you read about LLCs, you may think that setting them up is complicated. Generally speaking, the process can be divided into four phases. The first one is to pick a name for the LLC. It has to be unique and catchy at the same time as you need to choose something that has not been used yet.

The second part is when you get to deliberate how best the LLC will be managed. The two structural options are 'member-managed,' where everyone has a say, or 'manager-managed,' where someone will be heading the managerial processes.

For the third phase, you will have to file the articles of organization with the state government. Gov doc filing can be an issue of concern especially if you are completely new in the field. In that case, you can take help of a professional doc filing service provider. Other than that, tax ID application is another area of concern for a new LLC. You can find professional help for this as well.

Before you submit, have an attorney go through it just to make sure that it is credible and lawful. There are also online filing services that can do that for you.

Lastly, write the LLC operating agreement. The operating agreement serves as the foundation of your business so you need to take it seriously. Hire an attorney if you must to help out.