As an entrepreneur who is considering starting a limited liability company (LLC), there are various factors that you should consider. This article will discuss some of them and how you can start a successful LLC without any issues.
What is an LLC?
In the USA, a limited liability company is a type of business structure that allows its owners to avoid being held liable for the debts of the company. This type of business arrangement combines the benefits of a partnership and corporation.
An LLC can also protect its owners against various types of lawsuits. It is considered the most common type of legal structure used by small business owners.
1. Choosing a State for Your LLC
Since an LLC’s location depends on the laws in the state where it will be based, you must choose one with a well-developed legal structure. Delaware is a popular choice for many businesses due to its well-developed legal framework. However, it is usually best to start your business in the state where it is going to be operated.
2. Name Your Business
Before you start an LLC, you must have a well-defined name that will help you distinguish it from other businesses. For instance, the name should end with “LLC.”
You should also avoid using certain words that are not allowed by the state, such as “bank” and “trustee.” There are many other rules that you should consider.
3. Obtain Required Licenses
Depending on the type of business that you are planning on operating, you might need a license from either the federal or state government. For instance, if you are a firearms dealer, then you need a federal, state, and local license.
4. Consider Your Business Structure and Type
Small businesses with a medium to high-risk tolerance prefer to use limited liability companies due to their flexible nature and ability to run smoothly. Another common feature of an LLC is that its owners are usually self-employed. This type of business arrangement can help minimize the amount of time that it takes to keep track of the company’s activities.
This type of business arrangement is beneficial for companies with high uncertainty regarding their future operations. It can provide its owners with protection against potential lawsuits.
However, an LLC is not the best choice if you are planning on raising funds through external investors. Unlike other types of business structures, an LLC is not a public company and does not have shareholders.
5. Choosing How to Be Taxed
Due to the unique nature of an LLC, you must consider how you want to be taxed. Since it is a product of state statute, it can be advantageous for you to have the flexibility to pay taxes on your business.
One-member LLCs can be taxed as either a sole proprietorship or a corporation. On the other hand, multi-member LLCs can be treated as either an S corporation or a C corporation.
Types of LLC Tax Structures to Consider
1. Sole Proprietorship
One type of business structure that you can consider is a sole proprietorship. This type of business arrangement is typically treated as a disregarded entity by the IRS. This means that it does not file any tax returns. This type of business entity is not able to collect and utilize any tax forms.
The other type of business arrangement that you can consider is an LLC. This type of business arrangement is generally treated as a limited liability company. It is taxed the same as the owner of the company. An LLC that makes a profit from its activities is generally considered a self-employed entity.
2. Partnership
A multi-member LLC is considered a partnership since the taxes that it collects are then passed down to the partners. This type of business arrangement is commonly referred to as a partnership. The total profits and losses of the company are reported on Form 1065, which is the partnership’s official record.
3. C Corporation
If you are planning on filing a corporation as your business entity, you will need to complete and submit Form 8832 with the IRS. This type of business arrangement allows the LLC to be taxed as a separate entity.
The assets of the company and the owner are treated separately, which means that they can be claimed as a deduction. This type of business arrangement can be beneficial for its owners since it allows them to avoid paying taxes on their earnings.
4. S Corporation
S Corporation is another type of business arrangement that allows the owners to avoid paying taxes on their earnings. This type of business arrangement also allows the individual owners of the company to be taxed on their shares of the company’s profits.
Final Thoughts
An LLC is a great choice for small businesses since it has many features that are sought after by other companies. However, before you start a company, it is important that you thoroughly research the various advantages of this type of business arrangement.