If you are starting your own business, you might consider starting what is known as a limited liability company, or LLC. An LLC is a flexible way to start a business in most states, but what should you know before you organize one?
What is a Limited Liability Company?
An LLC is a type of private company available in the United States. Regulations governing how LLCs are formed and how they operate vary from state to state, but the basic business structure is almost always the same.
Essentially, LLCs are similar to corporations in that the owners (known as members) are not personally liable for any debts attributed to their company. Additionally, LLCs combine an element of sole proprietorship or partnership known as pass-through taxation.
Although LLCs are not corporations under state law, they often share certain characteristics of a corporation (limited liability) while giving members more flexibility to set up their business structure to suit their specific needs.
What are the Advantages and Disadvantages of an LLC?
Before you decide to organize your business as a limited liability company, it is important that you understand the benefits and drawbacks of creating an LLC in your state.
Advantages of an LLC include:
- Unlimited number of members
- Members have an option to choose their income tax classification, possibly taking advantage of “pass-through” taxation
- Members have personal protection from some or all liability for acts and debts of the LLC
- Members have flexibility at both the ownership and management level
- Flexible profit distribution
- LLCs are not bound by certain restrictions placed on corporations, such as annual meetings, extensive record keeping or annual reports
Disadvantages of an LLC include:
- Some jurisdictions may charge a “franchise tax” in order for the business to have limited liability.
- Doing business outside of the United States could cause the business to be treated as a corporation in foreign jurisdictions.
- Some LLCs may have difficulty raising money or financial capital.
For some businesses, especially sole proprietorships, forming an LLC might make the most sense.
How Do I Form an LLC?
Forming an LLC can be pretty simple. In most states, you’ll need to first choose an available name for your business that complies with the state’s LLC regulations. Once you have a name, you’ll need to select a registered agent who will accept legal documents if the company is sued and file the appropriate paperwork in your state and pay any required filing fees. (For example, a person wishing to create an LLC in Arkansas must file an application, known as the Articles of Organization, with the Arkansas Secretary of State.)
While not required in some states, it might be a good idea to create an “operating agreement” in which you set out the rules and guidelines for the ownership and management of the LLC. Some states may also require you to notify the public of your LLC organization. Once you’ve completed the proper paperwork and paid any fees, you may need to apply for additional business licenses or permits as well as fulfill any tax requirements.
Do I Need an Attorney to Help Me Form an LLC?
In most cases, you don’t need an attorney to help you apply for an LLC in your state. If your company has more than one member, or if the structure of your LLC is a bit more complex, you may want to hire an attorney to help you prepare your company’s operating agreement.
While it’s not something you want to happen, you’d want to hire a lawyer if you’re sued by an employee, client or other company. If you think your business might be at risk from the start, you may want to hire a lawyer to help with any necessary contracts or agreements. Ultimately, it’s up to you and your business partners to decide if you need to hire a lawyer.