Why an LLC

Are you having second thoughts about establishing a Limited Liability Company? Here’s some food for your thought, which hopefully will quell your doubts.

First and foremost, what is a Limited Liability Company or LLC? It is a company that reaps the benefit of the limited liability protection of a corporation and the tax pass-through advantage of a partnership company. LLC owners or ¬†members state their profit or loss in their personal income tax returns. This also means that your LLC business doesn’t need to pay the tax. ¬†Depending on the state rules, a Limited Liability Company can be a one man to many members company. There are generally no restrictions to the number of members a LLC can have (the maximum number varies from state to state). Members can be individuals, corporations, other LLCs and even from overseas unit.

Exception: Banks, Trusts, and Insurance companies cannot form a Limited Liability Company. Some states like California prevents doctors, architects, licensed health care workers, and accountants from setting up LLCs.

The “limited liability” umbrella protects the LLC owners from personal liability in business claims and debts. If the business runs into trouble, creditors cannot claim a right on the members’ personal assets like car, home, etc. It is the business and not the personal asset that is at risk.

A word of caution: This security blanket can be taken away if the members resort to illegal, unethical, or irresponsible business practices.

The next thing to ponder on is if a Limited Liability Company is worth your time and money. Well, think about these points:

  • You get the liability protection that is bestowed on corporation but without the corporate formalities.
  • Your are charged tax the same way as a sole proprietorship business owner or as a partnership company depending on the number of members in your Limited Liability Company.
  • You can be the only owner of your LLC in all the states.
  • The workings of a Limited Liability Company can be made less ceremonial. It requires say only a yearly members’ meeting for major decision-making.
  • LLC offers a flexible option: The company does not need to be in the same state as your business. A Limited Liability Company can be set up in your home state or in Delaware, Nevada or Wyoming.
  • It is an easy to implement option for small business ventures.

How to go about it

  • Select a business name that is not used by another company and that which abides by the state’s rules regarding choosing of LLC names.
  • Pay the fee and submit your paperwork.
  • Work out the “operating agreement” that will state clearly the rights and responsibilities of all the Limited Liability Company members.
  • If needed by the state, circulate a notice saying that you plan to start a LLC business.
  • Get the relevant permit and license that your business requires.

If you want your startup business to be as inexpensive as possible, as simple as the start-up process will allow, Limited Liability Company can be the answer. The fear in setting up a LLC is generally unfounded.  If you are clear about your business goals, have answers to your why and how, setting up a Limited Liability Company can be a wise decision.

About Brian Davis

LLC expert author and advisor. Has advised thousands of entrepreneurs over the last 15 years on which business structure is right for them. Brian is not an attorney or tax professional. If you need tax or legal advice, seek the assistance of a local attorney or CPA.

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