Getting your own start-up business off the ground is incredibly exciting; you’re bringing your vision to life, and no doubt ticking some things off your to-do list. You’ve spent time and effort raising start-up funding and hiring the best team, but something you may not have considered is whether you should make your start-up a Limited Liability Company (LLC).
Reasons To Consider Making Online LLC For Your Start-up
According to the National Association of Small Business’s 2017 economic report, 35% of small business owners opt to make their company an LLC—a process which can be completed easily online, but is an LLC right for you? (1)
What is an LLC
Essentially, an LLC is a type of business structure. There are a few main business structures that a start-up entrepreneur can choose to register as:
- A sole proprietorship is a company that is unincorporated and owned by one individual, ideal for owners who want full control. While this is the simplest model to set up, with little regulation, it creates risk for the owner. As the company and the owner have no legal separation, the owner is liable for all debts and obligations associated with the company. (2)
- A partnership is a company owned by two or more people, referred to as partners. Common among legal firms, partnerships allow each owner to have a say in day-to-day operations, and to take advantage of tax benefits. In a general partnership, all partners are liable for the company, meaning each partners’ personal assets could be claimed in a lawsuit, even if they did not directly have a part in the core dispute. (2)
- A corporation is a more complicated business structure, owned by shareholders. A corporation exists as a separate legal entity to the majority business owner and will continue to exist even if the majority owner passes away. Corporations are generally required to abide by strict reporting and board appointment requirements. (2)
- A limited liability company (LLC) is a more flexible option for business owners, allowing them to combine features of partnership and corporation business options. An LLC exists as its own legal entity, like a corporation, and has the tax benefits of a sole proprietorship. LLC owners are called members, and in most states, members may include individuals, corporations, and other LLCs. (2)(3)
Registering your start-up as an LLC with an online LLC formation service such as LegalZoom can provide you with many advantages; the following are some reasons why you should consider registering your start-up as an LLC online.
1. Protected personal assets
One of the most popular advantages of registering your start-up as an LLC is the level of protection that it provides for your personal assets. As an LLC is treated as a separate legal entity to its members, members are not considered liable for any debts incurred by the business and are also not considered liable for most business-related lawsuits. (4)
Provided that an LLC member has appropriately separated their business and personal finances, and has not committed any fraud-related crime, that member will likely not be at risk of losing their home, car, or personal funds in the event that their business is sued or experiences financial loss. (5)
If an LLC is sued or suffers financial loss, then creditors or plaintiffs can only seek compensation from the LLC assets, such as LLC bank accounts. Creating an LLC means you can limit personal financial devastation if your start-up experiences any significant issues. (4)
2. Taxation benefits
Pass-through taxation means that any profits associated with your LLC are taxed at the owners’ personal tax rate, as they are passed through the business to the owners’ personal tax return. (4)
If an LLC has a single member/owner, it generally enjoys the same tax rates as a sole proprietorship. If an LLC has two or more members, then it is treated as a partnership when it comes to taxes, and each partner pays based on their ownership stake in the LLC. (4)(6)
The Tax Cuts and Jobs Act created a pass-through tax deduction which took effect in 2018 and is expected to continue until 2025. This deduction may allow LLC members to access an income tax deduction of up to 20% of their LLCs net income. (4)
LLCs with multiple members can also choose to be taxed as though they were a corporation; if an LLC opts for ‘C corporation’ taxation, they will pay tax on profits at the corporate tax rate, which tends to be much lower than personal taxation rates. (4)
3. Simple set up
Registering your LLC online means that you have electronic records of your application, and can track its progress.
Registering a corporation can be extremely complicated, requiring the appointment of board members and directors, regular shareholder meetings, and a significant amount of paperwork. (4)
By comparison, LLCs are a relatively simple way to make your start-up a separate legal entity, requiring less paperwork or formal stakeholder appointments.
Legal requirements for LLCs vary from state to state, and some states mightn’t even require an LLC to produce annual reports or other documentation that may be compulsory for corporations. (5)
For a small business owner who would like to remain a separate legal entity to their business, without navigating complicated paperwork requirements, LLCs could be an attractive option.
4. Flexible options
The flexibility that is afforded to LLC members is one key reason why you may consider this business structure for your start-up. First of all, you can name your LLC pretty much anything you like. You can also have a DBA (doing business as) name – which can be different from your legal name. An LLC allows your business to be run by as many or as few managers as you like, whether they’re members or non-members.
You can choose to have all of your members share responsibility for day-to-day operations, designate just one or two managers, or hire a non-member manager. (4)
If you’d like to retain sole ownership of your business, your LLC can be registered with one member.
There is no maximum number of members that your LLC can have, so you can also choose to give ownership stakes to as many members as you like, whether they’re individuals or corporations. (4)
However you decide to set up your LLC, you’re not limited to the initial structure. Your LLC can grow and evolve in response to your needs, although some changes may require you to file an amendment. (7)
5. Established credibility
Last but not least, by choosing to register your start-up as an LLC, you immediately gain a new level of credibility among customers and investors. Being an LLC means that you have an official business name, and shows investors and potential clients that you’re serious about your business’s future. (4)
When combined with a solid online presence, being an LLC lends an air of legitimacy to your business which could help to attract and retain customers.
Navigating your first few years as a start-up owner can be daunting; between avoiding the common mistakes that cause start-ups to fail, and creating the perfect marketing strategy, deciding on a business structure is a task whose gaps you can easily fall through if you’re not careful.
It’s worth taking the time to consider registering your start-up as an LLC online, if the structure suits your business, and start enjoying the benefits.