Why is an LLC a Smart Choice for a New Business
Few things in life can be as gratifying as owning your own company. It's one of the hardest things you'll ever do, but it's also the most satisfying. Being your own boss and implementing your vision and standards to a workflow is special, and it can be a life changing experience if you do it right. People are also starting to shift towards that direction, creating startups, because a 9 to 5 job isn't doing it anymore for many out there. The question then becomes, how do you start a new business, and what does it take to make it? There are many angles to that question, but the one you need to settle on before anything else is the model of the company.
You'd do well to consider a Limited Liability Company (LLC) as your business model, because it's one of the smartest choices for up and coming startups. Here's why.
What is an LLC?
To understand a limited liability company, you first need to understand a few terms like double taxation and pass through taxation, which will be further explained below as well as why an LLC is your best option to avoid complications with the former.The importance of a limited liability is the fact that it allows owners to keep their personal assets separate from the business assets. This, in turn, limits the liability of the owners when it comes to the company debts and responsibilities. An LLC is basically a company that combines the pass-through advantages of businesses with the limited liability of a corporation. This has made them one of the fastest growing and most popular business models across the world for the many advantages they provide.
Why limited liability is the smart choice
The great thing about limited liability companies is their flexibility. An LLC can have one member or several as owners, and they can even be other businesses that act as owners. This gives a great range of freedom to those considering starting a new business but are not sure what their options are. There's also no limitations on the number of members a limited liability could have.
This is probably the most important advantage of an LLC company. It offers its members protection from liability for any actions the company takes. In other words, you would not be held accountable for the debts or actions of the business. So, your own personal assets -- cars, real estate, bank accounts, or any form of investment -- are protected from people the company owes money. This means they can't come after your own assets just because the business owes them money. This limited liability option is probably the biggest reason why LLC companies are very popular, because it keeps members' assets protected as long as the business and personal finances are kept separately and nothing shady is going on.
Avoiding double taxation
Double taxation is when taxes are imposed twice on the same source of income. So, basically, if you work in a company in a senior management position and are a shareholder, you'd be paying taxes on both your income from the corporation and when profits are distributed as dividends to shareholders such as yourself. Naturally, this has caused a lot of debate in the past about whether or not it's fair to do so. No business owner wants to be subject to double taxation, and an LLC is the best way to avoid that. This is why many startups are opting to start out this way, and they're finding it to be the better option, especially if they're dealing with an accelerator. The cool thing is you get to avoid double taxation and still have the option of supporting different classes of stocks. Choosing a C-Corp structure for your business means the company and the owner each gets taxed separately.
Pass-through profit taxation
Pass-through taxation or a pass-through entity is when a business model is employed to avoid or reduce the effects of double taxation. What happens in a pass-through entity is they don't pay income taxes on the corporate or business level. Instead, the owners pay the business tax on their own personal income. Fortunately for you, a limited liability company is by default a pass-through entity -- unless you choose otherwise. This means the company profits are directly given to the members without being taxed on the corporate level -- in other words you won't pay taxes on your profits. Instead, taxes are paid on the income tax return, which makes the whole filing process a lot easier because taxing on the corporate level tends to complicate things. If for any reason your business is losing money, there's a way out in an LLC. You can lower your tax burdens and take less of a hit on your returns.
Zero ownership restrictions
This is another pretty great feature in limited liability companies. There are no limitations on residency or citizenship. So, if you're a foreigner and would like to start an LLC business, nothing would stop you. If you're also a resident or a national and would like to have foreign partners, there are no restrictions or complications to get in your way.
What's the most annoying thing you've had to deal with in your previous jobs? Nine out of 10 people would say managers or their direct supervisors. With a limited liability company, that can be easily avoided. In an LLC, the company can be literally managed by all members who can be owners. This gives everybody a chance to partake in the decision making process. You could also hire managers from the outside to handle the managerial aspect of the business, and they'd also share in the decision making process. This is particularly a great option for people who don't have much experience in management and are looking for people to help with this aspect.
With limited liability companies comes great flexibility in choosing the location. You're not bound by certain city taxation laws, so you can start your business at any place you want. Naturally, it's always best to start at your own state, because that would make things much easier in the long run.
Ease of making change
If your business model is a C-Corp or any other, making changes in the structure of the company can be quite complicated and cumbersome. You'd need board meetings and several approvals to get things going. But with limited liability companies, the process is much simpler and requires much less of an effort. There's no need for continued work on the company structure, and it's very easy to add new partners or sell the shares of existing ones who'd like out. Basically, there are fewer restrictions and limitations with LLCs than most other forms.
Flexible profit distribution
For limited liability companies, you could choose to allocate profit shares to the owners out of the net income of the business in different percentages from their own percentage of the LLC. This is not the case with normal corporations, where they're required to allocate profit shares exactly in accordance with the percentage of ownership of the shareholder. This is a pretty cool advantage for as it means that you get to give people what they deserve according to not only how much they invested, but also how hard they worked. So, if person A wants to invest in a limited liability company, but not do any work, they could be given a smaller profit share than person B who wants to do the work and has the same investment as A.
Another great feature about limited liability companies is the fact that they require minimum compliance with formalities that often plague other companies. Corporations are usually required to have minutes for all meetings, hold at least one annual meeting of shareholders and board of directors, and adopt bylaws. That is not the case with LLCs, and they don't really have to do any of those things. They could if they wanted to, but they're not forced to do so.
Many companies that start out as LLCs do so to protect their assets against lawsuits that may be directed at their businesses for any reason whatsoever. Choosing C-Corp or S-Corp might be a bit risky for a business starting out. Still plenty convert to those models at one point or another after growing, because limited liability companies have limitations when it comes to how they can expand and grow. This is especially the case when it comes to acquisitions and mergers. So, it is definitely a good model for a starting company, but not necessarily so for an established one.
Nobody likes to handle paperwork and get stuck in the bureaucracy of going back and forth with governmental entities to register a business. LLCs have quite an easy registration process and the fees aren't exactly high. The fees will vary from one state to another, naturally, but they're all in the affordable range for anyone starting a business. You also don't need special experience to start one, and you don't need to hire a law firm to handle the paperwork or something. You can do it yourself. But still, to be on the safe side you might want to consult with an accountant or a lawyer before finally submitting your papers.
LLC further explained
Should you use this model for your new business? That is the question you should be asking yourself. Whether you choose to start your business as a limited liability company or not, in any case, it's in your best interest to find out as much information about LLC, and how they work, because you should be aware that they do have their cons. It's important to learn these coins because they might sway your decision after all. So, while we learned about the advantages before, these are the disadvantages, so you could make an informed decision based on the full picture on limited liability companies.
Yes, an LLC does have limitations even when it comes to legal proceedings. A court of law may rule that your very own company doesn't protect your personal assets. This happens in case a business doesn't clearly separate between the business and personal transactions, which makes you at risk of this problem happening.
Member turnover complications
This one might be a big hiccup for many LLCs, and it's unavoidable in some cases. Many states have a law that stipulates that if a member left the limited liability company or passed away -- or even went bankrupt -- the company has to be dissolved. The remaining members in this case will be financially and legally responsible to handle all remaining procedures to finalize the termination of the company. There's nothing stopping you from doing business in the future, but you'll have to start a new one, unfortunately.
Since it's important to separate business from personal finances, you're going to need a separate bank account for the LLC. Those usually come with high fees from banks and monthly expenses for those business accounts. Even if a check gets issued to your company, it has to be deposited into your account -- cannot be cashed right away -- and you'll be charged extra for making the deposit by most banks.
Now you understand the requirements of starting a limited liability company, and more importantly the pros and cons of doing so. At the end of the day the choice is yours to make. Yes, starting a limited liability company comes with a lot of pros, but it also comes with some cons. It's up to you to weigh them and find out if you really need to start your company in this particular business model. If you do, remember to pay great attention to selecting a proper name, because changing the name of a limited liability company can be rather hard. So, choose well, because you might not get to rename it.