Limited Liability Companies, or shortly LLCs, are often wrongly perceived as “no-risk business ventures” given that “limited liability” is the whole premise of giving it a shot in the first place. LLC businesses have their own benefits and pitfalls, and today we’ll talk about everything you need to know if you’d like to start one, so let’s begin from the very top.
When should business owners opt for the LLC business structure model
First of all, forming this type of company is relatively cheap in comparison to other structure models, but more importantly, you won’t answer for the LLC’s business debts with your personal property (unless you’ve either committed illegal acts or misused your position).
Obviously, it’s the perfect solution for merging small businesses, as well as an evolution of a singular small business that wants to isolate personal property from business property. While small LLCs can potentially become large, successful corporations, established enterprises are rarely adopting this form, given that each member has an equal say.
LLCs are exempt from double taxation
By definition, members of a corporation are individual, separate entities from their company in the eyes of the law. As such, they are also taxed separately from their business. This, however, is not the case with a limited liability company, which is exempt from double taxation in most countries.
LLCs can choose to receive the same taxation treatment as corporations in lieu of partnership taxation. While each member’s income will be still reported on tax returns, but the exclusion from double taxation is still a huge benefit and the reason why many small business owners opt for this type of structure.
LLC members are not ‘partners’
One of the most important aspects of an LLC is the function of its members. Namely, most of the other company types have a hierarchy of sorts while limited liability companies do not. Each member has an equal vote regarding the business’s trajectory and operations.
Operating Agreement is key to building a strong, long-lasting LLC
An ideal way to define what sorts of responsibilities each member has is to create the Operating Agreement. This document establishes the fundamental rules of your new company and allows you to anticipate the actions of your fellow members with more accuracy, although it’s equally binding to you as the LLC’s member as well.
Without this agreement, the actions of each member would be prone to legal interpretation, which may lead to your company being perceived and treated as a limited partnership instead.
Another reason why operational agreements matter is to protect the company from the state itself. Without an established formal agreement, default rules apply, which aren’t always beneficial to individual members of any company.
LLC can be founded and governed by a single member
Single-member companies can take many forms, and LLC is among the most popular ones. Given that the purpose of the ‘member’ function in the limited liability company is fairly specific, the fact that there’s one changes the dynamic of the structure considerably.
This version of LLC has one ‘member’, but it does not necessarily need to have a single person within the entity. The member is essentially the owner and decision-maker while the company can have numerous workers underneath.
One-person LLCs are set up in the same way as multi-member LLCs, with the only exception being that a single individual is listed as the company’s member. As soon as the company welcomes another individual (or individuals) that are listed as members, the company’s structure changes.
Aspiring LLC services usually have more than one member, each leveraging different technologies, patents, and contacts into the company. However, one-person limited liability companies with strong leadership have a good shot to dominate the market just the same.
Most small businesses start off as LLCs due to the structural flexibility
Unless it was declared otherwise in the OA, LLCs can morph and evolve into S Corporation under certain circumstances (prescribed by IRS’s requirements). This flexibility allows everyone within the entity to concentrate on more productive aspects of managing the business, unburdened by complex formalities.
It’s also possible for LLC to have multiple owners, in which it needs to become a Partnership, or file Form 8832. Unlike the situation where LLC members willfully decide to morph their company into a corporation, in the second case it’s a necessity.
When you should turn your LLC into a Corporation
After spending some time on the market as a limited liability corporation, you will inevitably encounter some friction from your target customers.
Most consumers perceive LLCs as legitimate, trustworthy businesses, but when it comes to hiccups, such as returns, faulty products, or confusion in general, people would like to know who runs the company, who oversees production, and who’s the one responsible for whichever problem occurred.
As an LLC, you don’t have to worry about that too much, as all members are equally responsible. However, that also means that you can’t influence your potentially dissatisfied customers in this respect.
More importantly, rapidly-growing limited liability companies can funnel a considerable amount of profit and qualify for a step-down tax bracket by becoming a corporation. S Corporations are bound by legal restrictions in terms of the number of members who can be listed as owners, though, but by the time you’ve experienced company growth and gained insight about your niche, you’ll be ready to convert your company with clarity.
LLCs can’t issue stocks
Although this is not the biggest pitfall of limited liability companies, the fact that your firm can’t issue stocks means that you won’t be able to attract investors as successfully. Investors can help plateauing brands boom in record time, and as LLC, such an option still exists, but it’s far more complex.
Again, your company will have the opportunity to reshape its structure into an S Corporation, later on, eliminating this drawback. At the same time, the protection provided by the LLC form will also dissipate, so weigh your options as your brand progresses on its path.
We hope that this brief guide was useful to you and that you have learned something new today on how to start an LLC. Make sure you are staying safe in these times we are all going through and have a good one, guys!
