If you look at the full names of the businesses around yours, you’ll see that many are organized as some form of LLC. This is a limited liability company, and it has many potential benefits. If you’re wondering whether your business should seek LLC status, you should know the following.
Purpose of an LLC
The main legal value of an LLC is that it installs a partition between your personal assets and those of your business. This partition also separates your liabilities. If you’re still operating as a sole proprietor, there is massive potential legal exposure on this front.
Suppose a person runs a business creating e-commerce websites for local shops. Worse, at some point, a hacker compromises the credit card processing system for sites. The shops then successfully sue the website creator because the security was negligent.
If that person is a sole proprietor, those shops can place liens on everything that individual owns. Had the website business been an LLC, though, they would have had to stop at taking the money and assets of the company. The individual’s assets would have been secure.
There is also similar protection for the owner’s personal assets if the company has to file a business bankruptcy. Essentially, the LLC will go bankrupt, but the individual will not. This means you can keep your car and house that you bought with your pay as an officer of the company.
Forming an LLC
The process to apply for an LLC is fairly standardized, although there are variations across different states. You should collect basic information about yourself and any other owners of the business. It is also a good idea to do a search to ensure that no one else in your industry is using your preferred name in your state. You will also need to appoint a registered agent, an individual, or an organization that acts as a point of contact.
Unsurprisingly, your state will charge a fee for processing the application. Presuming the state’s search doesn’t turn up any problems, such as errors on the form or conflicts with similarly named businesses, the government will almost certainly grant the request. The important thing is to be thorough and accurate in filling out the forms.
After that, your state may also have a yearly renewal process. It is also a good idea if you plan to wind down the business to file with your state to end the LLC. No surprise, there’s typically a fee for officially ending the company.
Does an LLC Have to Remain One Forever?
No, an LLC can reincorporate as a different type of company. This is a more complex process, though. LLC status is largely meant for small and medium businesses. If it gets too big for that legal status to serve its purposes, though, the LLC can reorganize as an S-Corp, partnership, or C-Corp. These other organizational structures are usually better if your company needs to seek investors, issue securities, or become publicly traded. You could also sell your LLC to another company or even conduct a merger, taking on the legal status of the resulting entity.
Benefits of an LLC
Beyond the previously mentioned liability protections, an LLC also has the added benefit of legitimacy. If your company needs to sue someone, it can do so with the business name. Likewise, it has the legal protection of registering its name with the state, thus excluding others in your industry from using it or something deceptively similar.
There are also tax benefits. An LLC is a pass-through business, meaning that income paid to the owners is treated as personal income. Depending on your financial situation, this could allow you to take advantage of certain tax breaks that are unavailable to a business. Also, you can determine how much to pass through each year, allowing you to precisely determine your taxable income from the company. If you don’t want to take too much to avoid a higher tax bill, simply leave the money in the business.
The LLC is one of the most common business structures in America. If you’ve been in business for any length of time, forming an LLC is a great way to protect your interests going forward.