In case you’ve been living under a rock (no judgement), or you are completely new to the world of business, a LLC stands for a Limited Liability Company. Just like a sole proprietorship or a traditional partnership, it is a type of business structure. Deciding on a business structure will directly influence how you pay taxes, whether you are personally liable for any debts incurred, and the number and kind of regulations met. Unlike the above two mentioned, however, a LLC is a lot more basic and easier to maintain. Furthermore, it affords you with similar legal protections to that of a corporation, but allows you to continue operating as a small company.
Advantages of a LLC
1. Limited Liability
As the name suggests, the biggest advantage of filing as a LLC is the protection it offers business owners from any debts or lawsuits incurred by the business. As such, creditors are prevented from having access to personal assets of members of a LLC. Other business structures, like sole proprietorships and / or traditional partnerships do not offer the same protection as a LLC. It is worth mentioning, however, that this protection does not incorporate illegal actions or negligence on the part of the business owner.
The second biggest advantage of filing as a LLC is the tax benefits it includes. Not only can you decide how you want to get taxed, but generally, a LLC is considered a “pass through entity” by the IRS. This means that profits and losses go straight to the owner/s. Alternatively, you can stipulate how you would like your company to be taxed in your Operating Agreement (to be explained below). There are various options in this regard:
- Single Member LLC: you will be taxed similar to that of a sole proprietorship. Profits and losses are taxed through the member’s personal federal tax return. Within this structure, you will need to file a Schedule SE for self-employment taxes and a Schedule C to display revenues and deductions.
- Partners in a LLC: you will be taxed similar to that of a traditional partnership. Within this structure, you will need to file a partnership return (known as a 1065) and K-1’s for each member.
- LLC Filing as a Corporation: you will be taxed similar to that of a corporation.
Unlike many of the other types of business structures, LLCs are very flexible. This is mainly due to the Operating Agreement which allows you to develop the regulations that control your company. Should you opt to not create an Operating Agreement, your business will be controlled by the regulations within your state. Aside from the Operating Agreement, as can be seen below in the set up of a LLC, there is minimum paperwork required and it is one of the easiest business structures to establish.
From a client perspective, having ‘LLC’ incorporated in your business name immediately makes your company sound more professional and it is assumed that you are registered with the state. As such, you are viewed as a more notable legal establishment.
Step-by-Step Guide to Setting Up a LLC
1. Select a Business Name
Naturally, you’ll need to ensure that you don’t choose the same name as an existing LLC within your state. You will also need to check on the state regulations regarding LLC names. Usually, it will be required that ‘LLC’ appear in your business name.
2. Develop & File Articles of Organisation
This is a basic document initiating a LLC. It is usually a basic form in which you simply need to fill in the blanks. This will be standard information in the form of your business name, company address, names of business owner/s, etc.
3. Nominate Registered Agent
One person will need to act as the registered agent for the LLC. This will be the person – usually the owner – representing the LLC and nominated to accept any legal documents relating to a lawsuit.
4. Payment of Fees
This will be state dependent, so be sure to check up on it.
5. Publish Notice of Intent
This is only required in some states. It involves publishing a legal notice in the local paper, announcing your intent to form a LLC. You might be required to publish the notice many times over period of weeks / months, after which you might have to file an affidavit of publication with the state.
6. Develop a LLC Operating Agreement
As mentioned, an Operating Agreement may not necessarily be required to be filed with your state, but it is recommended to avoid future conflicts. It can be simple and not prepared by an attorney, although this is advised. In a nutshell, the Operating Agreement details the rights and responsibilities of the owner/s, their voting power, percentage interests in the business, as well as the scheduling of owners meetings. It is similar to that of corporate bylaws or partnership agreements. An Operating Agreement can be obtained from the state office or through a web search, although be sure to make sure it is specific to your state.
Samantha Carvalho is the Chief Marketing Officer of Practice of the Practice. She lives in Cape Town, South Africa, with her husband and kitten. Over and above Practice of the Practice, she is passionate about women empowerment, fashion, and animals.