Starting an LLC

What You Must Know Before Starting an LLC

Did you know that there are more LLCs in the U.S. than any other form of business? About a third of all businesses are LLCs, which makes it the most popular legal business entity.

When you start a business, one of the first decisions you have to make is your legal structure. You can be a sole proprietor, LLC, or corporation.

LLCs are popular, but they’re not for everyone. What are the things that you need to know about starting an LLC?

Read on to discover the LLC pros and cons so you can start your business on the right foot.

What Is an LLC?

LLC means limited liability corporation. It is a legal structure used to create and operate a business.

The people the form the LLC are members. You can have one member or many members of an LLC. The laws that govern LLCs are state laws.

The IRS usually has a say in how LLCs are taxed. We’ll get to that later in the article.

What you need to know about LLCs is that they provide legal protection for the members of the LLC. To understand what this means, we need to take a look at the other legal business entities.

The most common one is a sole proprietorship. From a legal and tax perspective, you and your business are one and the same.

With a corporation, you and the business are two separate entities. You have separate legal liabilities and are taxed separately.

An LLC gives you the personal legal protections that a corporation does.

It Takes More Work to Become an LLC

Why do so many sole-proprietors balk at becoming an LLC when there are so many advantages? A lot of the time, it comes down to money and confusion.

Every state has different filing requirements, but you usually need to have the articles of organization and the operating agreement. These are two legal documents that govern how your LLC is organized and operated.

Some people feel more comfortable having an attorney file the paperwork for them, which can cost about $1000 or more.

There’s also the need to find a registered agent in the state where you register your business. Some states, such as Pennsylvania require that you use a registered agent when you register your business.

A registered agent is an official address for your business, but it’s different from your business address. Your business address is where you conduct your day-to-day business activities.

Your registered agent is kind of like a virtual mailbox for official business notifications. They can receive paperwork related to lawsuits and documents from the state.

If you don’t live in a state that requires you to have a registered agent and you’re self-employed, you should still get one. That’s because your home address would appear on all publicly available documents.

If someone looked up your business, they would find your home address. That becomes a privacy and security issue for you. In other words, get a registered agent for your business.

Many registered agents will register your LLC for you for a small fee on top of the registration fees.

Delaware May Not Be the Best Place to Incorporate

One of the biggest misconceptions about creating an LLC is that you have to have a Delaware corporation. That’s not necessarily true in your case.

Delaware is popular with Fortune 500 companies and it is the legal home of nearly 90% of all companies that went public in 2019. The reason why it’s so popular is due to the business-friendly laws and court system.

It’s a no-brainer for a large entity to incorporate in Delaware. For a small business, the answer isn’t that simple.

If you’re registered in Delaware and conduct business outside of the state, then you’ll need to file as a foreign entity in that state.

For instance, if you’re business is located in Oregon, and you register in Delaware, you still need to register your business in Oregon. That is where your income is sourced, even if you have customers across the country.

Since you conduct a business within Oregon, you have to register your business with the Secretary of State’s Office as a Foreign LLC.

In the end, you don’t have any real advantage and you end up spending more money in the long run.

What about Wyoming, Florida, or Texas? Those states don’t have income taxes, so you’d think it would save you money to register in those states.

It does only if you are a resident of one of those states and you conduct your main business activities in one of those states.

LLCs Taxed as an S-Corp

LLCs have an option as to how they want to be taxed. You already learned that LLCs are usually taxed like sole-proprietors, where you report your business income and expenses on your personal tax returns.

If your LLC makes enough money, you can choose to be taxed as an S-Corp. In this scenario, members report their profit distributions on their personal tax returns and

One thing to note is that if you do get taxed as an S-Corp your LLC can’t have more than 100 members.

Learning the LLC Pros and Cons

Business formation is one of the most important decisions to make when you’re starting a business. It can impact your legal exposure and you could end up paying more in taxes.

An LLC is usually a good option, but you need to know the LLC pros and cons before you decide. Think about your type of business, your budget, and your vision for the business.

For more business and legal insights, check out the Law section of this site.

About Ambika Taylor

Myself Ambika Taylor. I am admin of https://hammburg.com/. For any business query, you can contact me at [email protected]