When you plan to open a business or a start-up, the biggest question that comes around is what type of company you should start. The available options you get are proprietorship, partnership, or a private limited company. Another option that you have upfront is an LLC or a limited liability company.
An LLC is a business structure created by more than two people that protects their assets in case of a debt or a liability. Further, it has pass-through taxation meaning the owner will pay the taxes from the individual income generated. It saves them from double taxation on salaries. An LLC also offers a hassle-free process of distributing the ownership.
The whole process of creating an LLC is not as easy as it sounds. People often have questions such as “What to know before starting an LLC?” or “What should I know before starting an LLC?” in their minds. To simplify and sort out these questions, we have listed down six important things you should consider before setting up an LLC.
Taxation Process of an LLC
The majority of people find the process of paying taxes frustrating process. However, with an LLC, this process is quite flexible, and it gives you the option of how you want to be taxed. Since the whole process is quite long, we can’t mention it entirely here. But we will try to give you a short overview.
IRC usually ignores LLCs with single members and taxes them as an individual, and the LLC income is mentioned on your tax return at the end of the year. For multi-member LLC, things are a bit different. The LLC doesn’t pay taxes on its profit, and instead, all the profit goes to the members first. From there, the members pay taxes on their returns.
If you don’t want the above options for your taxation, you can also be taxed as a corporation. Again, the individual pays it for state taxes, not the LLC itself.
Importance of Operating Agreement
An operating agreement is a vital record that you should know before starting an LLC. The prominent role of this agreement is to control how your business would operate according to your needs.
They protect the liability status of your business, handle the verbal agreement, and outline the essential ownership. For creating an operating agreement, you should preferably contact professional corporate agents.
License and Permits
Usually, most states don’t comply with you to obtain a license for an LLC. However, if your business involves Agriculture, Aviation, Transportation, Fishing, or Wildlife, then you will need a permit for that. To obtain a license, you may contact your local or state government’s office and fill out the necessary forms.
Maintaining a Corporate Veil
We know that an LLC protects your assets in case of a lawsuit or liability, and this safeguarding is known as the corporate veil of the LLC. But starting an LLC doesn’t mean your corporate veil is permanent. It can still be pierced if you don’t take care of the following things:
1. If the company involves any fraud from the owner, then the corporate veil wouldn’t work.
2. The separation of the LLC from its owner is mandatory. If an owner uses the business account for their personal affairs, then it’s treated as serious misconduct.
3. If a business partner doesn’t pay the amount, the court will mistreat it. In this case, the corporate veil wouldn’t work either.
Disadvantages of an LLC
We all know how beneficial LLCs are for multi-member partnerships, but there are certain disadvantages of an LLC too. You should also have proper knowledge about it before starting an LLC. The two major drawbacks of an LLC are given below:
1. Ownership transfer in an LLC is quite tricky as it doesn’t have stocks like a corporation. For a multi-member LLC, this ownership transfer process becomes more burdensome as you will have to get the signatures of all the members.
2. LLCs are often not preferrable by big investors as they choose corporations over LLC for any investing. So, if you need investment for your company, you should form a corporation instead.
See Also: Definition of PEO for Small Businesses
Since LLC doesn’t have a board of directors, all the flexibility and control come into the hands of its members. Usually, there are two types of LLC management structures – member-managed and manager-managed.
A member-managed structure is where the members decide how to run the LLC. While in the case of a manager-based LLC, any member/s or non member/s are chosen as the manager to lead the company.
LLCs are the most popular choice for people who want to start a start-up company. Owners often have doubts in their minds which we tried to clear in this article. We also highlighted some critical aspects like Taxation, License, and Permits required while starting an LLC.