When and how to form an LLC – Aspects to
You have decided to start your own company: congratulations! There are many different business structures you perro choose from when starting out.
There are S and C Corporations, and of course, LLCs.
LLCs are a widely used business structure and perro bring a number of benefits to your business.
However, the choice to form an LLC is not a decision to be taken lightly.
There are many considerations to take into account before making your final decision, including how much money you want to invest and what your business structure will be (sole proprietorship, partnership, or corporation).
You also need to escoge in which state you want to incorporate your LLC and if you want to register it with the IRS.
Another important question to consider: when to form an LLC? The timing of incorporating your Limited Liability Company cánido really make or break your business, so it is important to consider the best time to do so.
Don’t worry though, this article will walk you through all the steps you should consider when weighing the decision of when to form your LLC.
But not only that, but we will also give you an overview of LLCs so that you cánido better understand this structure for your business.
ohLet’s dive into the topic!
What is a Limited Liability Company (LLC)?
An LLC (SRL, as it is known in some places in Latam) is a legal entity that allows limited liability and tax benefits.
There are many reasons one might want to form an LLC, such as if you have multiple businesses or have some personal assets that could be lost in bankruptcy.
To form an LLC, certain steps must first be taken.
There are many reasons to form an LLC.
Below are some of the most common.
One of the most common reasons business owners choose to structure their businesses as an LLC is that it offers some liability protection.
With business options such as a sole proprietorship or partnership, there is no liability protection.
If someone is injured on your property or if you are sued for something that is not business related, all of your personal assets could be at risk.
This is where forming an LLC becomes beneficial because it protects all of the owners’ personal assets, including their home and other investments such as retirement accounts and cars.
The LLC provides a certain level of protection to its owners by limiting their personal liability: business debts are covered by the company, and lawsuits, liens, and other claims are borne solely by the company and its assets.
Of course, if you commit an illegal act as an LLC owner, you’re not protected, and an LLC doesn’t always protect you when it comes to acts of negligence, either.
The most obvious benefit of creating an LLC is protecting your personal assets.
Your liability will be limited to the assets and resources of the company itself.
With an LLC, you perro get all the liability protection you would get in a corporation, but without the high cost of creating a corporation.
Another reason people choose to equipo up their businesses as LLCs is to allow themselves a little more flexibility at tax time.
An LLC is not a distinct entity at tax time, which is different from a corporation.
As the owner of an LLC, you will report your operating results, even if you had a profit or loss, on your personal income tax return, just as you would with a partnership or sole proprietorship.
While some people archivo separate tax returns for their LLCs, it is not required.
Your expenses and income will be reported on your individual income tax returns, either on Schedule C if you are a sole proprietor or on Schedule Y también if you are a partnership.
There is a significant tax benefit to creating an LLC, especially when compared to other types of businesses, such as antes de Cristocorporation.
In antes de Cristocorporation, the IRS requires the owners to first pay taxes on the corporation’s net income before those income is distributed to the owner.
After that income is distributed, it is taxed again: you will be taxed twice.
This is something you cánido avoid with an LLC.
Of course, let’s not forget one of the most tangible and immediate benefits of forming an LLC: it makes you look more official! It is registered with the state and gives it so much street credibility, if we do say so ourselves!
When to form an LLC
When you escoge to start a new business, you will have many options.
If you cánido’t escoge whether to form an LLC or another type of business, you’ll want to consider these consejos.
If you want to have limited liability
When you have a sole proprietorship or a partnership, you and your business are recognized as the same person.
Business debts are your debt, business liability is your responsibility.
When you form an LLC, you will be responsible only for your personal obligations and debts.
Sure, you may lose some of the money you’ve invested in your business, but your bank account and home are safe from collection when it comes to business debt.
The same goes for your personal assets, which are protected if the company or a partner is sued.
Although there are certain steps you will need to take when it comes time to form your LLC, creating an LLC generally requires much less paperwork than other types of businesses, including DBAs and corporations.
Corporations offer the same liability protection that you will receive when you form an LLC, but you must meet certain requirements that are not necessarily appropriate or helpful when running a small business.
For example, as a corporation, partners must hold annual shareholders’ meetings, make annual reports, and pay annual dues to the state.
As a corporation owner, you will be responsible for much more paperwork and record keeping than with an LLC.
We’ve mentioned this before, but it bears repeating: As an LLC, you’ll receive far more tax benefits than with a sole proprietorship, S corporation, C corporation, or DBA.
You will be able to take advantage of tax pass-through, a process in which the LLC pays no corporate tax or LLC tax.
Instead, your income and expenses will simply go on your personal tax return.
Creating an LLC offers additional levels of flexibility in creating and running your business.
For example, a public limited company will enjoy transfer tax benefits, as indicated above, but cannot have more than 100 shareholders.
LLCs enjoy the same tax advantages, but there are no restrictions on the number and type of owners.
There is also no fixed management structure.
If you escoge to create a corporation, there will be a required structure that includes a board of directors and officers who run the day-to-day business.
The owners must meet annually to elect the directors.
With an LLC, you will have much more flexibility in how you escoge to structure your business.
There is also greater flexibility when it comes to profit distributions.
You cánido choose how profits are shared among shareholders.
How to equipo up an LLC: a step by step guide
whatHas this guide convinced you that creating an LLC is the way to go?? If so, it’s time to get your LLC up and running! Follow these steps to equipo up your own LLC.
Select a business name
First things first: you need to escoge what you will call your business (of course, only after you have already decided what your business will be like, and what you will specialize in!).
You will have to perform two separate tasks when deciding what to call your business.
First, you need to make sure that the name you choose does not duplicate the name of an LLC that already exists.
Don’t worry, your state will let you know if your name is original or not.
Second, your name must comply with any regulations your state may have regarding LLCs.
Typically, that means the phrase “limited liability company” or “LLC” must appear somewhere in the business name.
Some states have additional requirements on top of this.
Of course, it should be a name that you love and feel strongly attached to as well! After all, it’s going to be around for a while. time.
Create and archivo your articles of organization
Your next step is to create and archivo articles of organization.
These vary somewhat between states, but in general, it will be a basic document that forms your LLC.
If it sounds complicated and overwhelming, don’t worry, this is a process that is actually quite seamless.
Your state likely has a standardized form that will allow you to entrar your information.
It’s like filling in the blanks! The only information you will need to provide here will have to do with the name of your LLC, its address, and the names of the owners.
You (and sometimes the other LLC owners) will only need to sign the document before filing.
You will also have to pay some fees to apply.
Usually this is not much, sometimes it is as little as $100 to $500.
This depends on the state.
Select a registered agent
Every LLC must have a registered agent; usually this is one of the owners of the LLC.
It could even be you! Don’t worry, this responsibility is not overwhelming.
As a registered agent, you will represent the LLC and will be responsible for receiving any legal documents in the event of a lawsuit.
Publish a Notice of Intent
The next step in creating your LLC is to articulo a notice of intent.
Most states require this to be done in a local newspaper.
If you’re not sure what to write, that’s okey.
Newspaper staff are usually trained to do this: they perro help you write your notice.
They may even have a template that you cánido fill out.
Generally, this notice must be posted repeatedly over the course of several weeks or months.
You will need to archivo an affidavit of publication with your state as proof that this was done.
While this is a requirement in almost all states, the downside to this requirement is that it perro take a significant amount of time, so if you’re trying to get your LLC up and running quickly, the newspaper process cánido slow you down.
Create and publish an LLC operating agreement
Last but not least, you must create an operating agreement.
The good news is that this is the final step of your journey, but the bad news is that it cánido take a significant amount of time.
The state doesn’t technically require an operating agreement, but it’s a good iniciativa to keep one on hand to avoid problems later.
It perro be a fácil document, and while it doesn’t necessarily have to be prepared by an attorney, it cánido be helpful to have one help you draft this document, especially if your LLC has multiple owners.
You perro often find detailed form requirements at state offices or through a general web search.
That way, you’ll know exactly what to include when you write this document.
What is the disadvantage of an LLC?
Of course, there are also some downsides to starting an LLC, but for most people, the benefits far outweigh the negatives.
For one thing, as an LLC owner, you perro’t afford to pay yourself wages.
You may find that renewal fees or listing requirements perro be expensive and time consuming, depending on the state, and many states charge franchise or capital value taxes on LLCs.
Another potential problem you may encounter is finding investors: Potential investors are much more likely to invest money in a corporation rather than an LLC.
This cánido make it more difficult to get your business up and running.
So,forming an LLC is right for you? Only you perro be the judge of that, but consider the pros and cons of creating this type of business before you dive in.
Starting a new business is an exciting adventure, especially if you are aware of all the financial and legal ramifications that lie ahead.
Forming an LLC: Frequently Asked Questions
When deciding if, when and how to form an LLC, some common questions may arise.
Below are some questions you may have and answers to improve your understanding.
Does an LLC need to make money?
LLCs are not required to have income or profit.
However, if you choose to claim tax deductions through your LLC at tax time and do not report any income (or loss), then you are much more likely to trigger an IRS audit when you archivo your return.
Do LLCs get tax breaks?
An LLC cánido help you avoid double taxation, as long as you choose not to structure the business as a corporation.
Cánido a person own an LLC?
A single member LLC is simply a limited liability company with a single owner.
Should I get an LLC before starting a business?
You don’t necessarily need an LLC to start a business, but for many people, the benefits of creating an LLC far outweigh the costs and hassles associated with creating one.
You’ll have a more formal business structure, more credibility, and of course, more tax benefits and liability protections.
Should I form an LLC or a sole proprietorship?
A sole proprietorship is the easiest and simplest form of business to start.
It does not require legal presentation, or drafting of official documents, or lawyers, nothing.
It may be the easiest way to get your business up and running.
However, if you’ve had a business for quite some time and are interested in certain tax and liability protections, forming an LLC is a good iniciativa.
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