It’s critical to understand your duties while beginning a company. Forming an LLC may assist you reduce some of the legal and financial risks associated with sole proprietorship.
Table of Contents
The most basic kind of business is the sole proprietorship.
If picking the simplest and least costly kind of structure is your primary priority when creating a company, a sole proprietorship is unbeatable. You are the business in a sole proprietorship, and there is no legal division between the two. This structure is exempt from corporation tax. Instead, the proprietor pays personal income tax on the earnings of the business (along with self-employment tax).
Owners of sole proprietorships often establish a “doing business as” (DBA) name to create some separation between the company and themselves. This gives them the ability to offer their company its own name and identity for branding and marketing reasons. The cost of registering a DBA varies by jurisdiction but is often between $10 and $100.
While forming a sole proprietorship is simple and affordable, this company structure puts the owner’s personal money at risk. Because there is no legal separation between the business and the owner, the owner is personally accountable for any debt incurred by the firm as well as any damages owed as a result of a lawsuit. In certain situations, the owner may have to pay these expenditures out of pocket.
Limited Liability Company: An Interesting Option
A limited liability corporation (LLC) is a very simple choice for small enterprises. Furthermore, LLCs have certain benefits over single proprietorships. These benefits include:
Personal Asset Security
The most major benefit an LLC has over a sole proprietorship is the additional layer of legal protection it provides between the firm and its owners. This protects the owners’ personal bank accounts and assets, such as vehicles or real estate, if the company runs into financial difficulties. An LLC form significantly decreases an owner’s risk, particularly as the firm expands. However, as the name implies, this protection is limited. While an LLC company structure isn’t guaranteed to protect an owner from responsibility in all situations, it does in most ones.
Flexibility in Taxation
There are no tax breaks for sole proprietorships. A sole proprietorship has the same tax status as its owner since it is an informal, “pass-through” organisation. Owners of LLCs, on the other hand, have many taxation alternatives by incorporating the firm as a sole proprietorship, corporation, or partnership. Because of this flexibility, LLC owners may choose which tax status is best for their company.
Increased Growth Prospects
Another advantage of an LLC form is that it may make your company seem more professional and respectable. This increased reputation has the potential to help you get customers and increase sales.
Increased Capacity to Raise Capital
If you need to obtain financing or sell your firm, an LLC will make both considerably simpler than a sole proprietorship. Investors will take your company more seriously if it is organised as its own legal entity.
It’s Easier Than You Think to Form an LLC
With all of the benefits that creating an LLC may provide, you may be concerned that it is a difficult and costly procedure. However, incorporating an LLC is a rather simple and affordable process.
Fees are low.
Starting a sole proprietorship is free, while registering a DBA for a sole proprietorship normally costs between $10 and $100. While this is the cheapest option, the cost of incorporating an LLC often runs between $100 and $800 – still a reasonable amount for starting a new firm. LLCs must submit yearly or biannual reports in several states. While these reports normally come with a price, they are usually less than $100. (check with the proper state regulatory office in your state to determine the exact costs for your LLC).
Simple Formalities
LLCs must be registered at the state level, usually with the secretary of state. This usually requires the filing of a document known as the Articles of Organization (or a similar term, such as Certificate of Formation or Certificate of Organization) that details basic information about your company. This is a reasonably straightforward procedure that you may perform on your own or with the assistance of a third-party specialist. Once you’re in business, you’ll have to comply with restricted reporting obligations, which typically involve a brief annual or biannual report document.
Restricted Regulations
In contrast to corporations, LLCs are not required to have director and shareholder meetings or to take minutes at any meetings. However, LLCs must choose a registered agent. While this is not a difficult process, it is one that a single proprietorship may avoid. LLCs are also subject to minimal ownership constraints. Owners of LLCs might include other LLCs, businesses, non-US citizens, and others.
Create Your LLC Today
If you feel that an LLC is the best structure for your company, just follow the procedures below to make it official. While the actual procedure may differ somewhat from state to state, the following list should give you a good sense of what to expect:
Give your company a name. Conduct a company name search to confirm that the name you choose is accessible. Most states’ websites provide a company name lookup function.
Choose a registered agent. This person may be a member of the LLC, or you can choose a third party to fill this job.
File the organisational papers for your LLC. Many governments refer to this text as the Articles of Organization, although others do not. Whatever you call it, it’s generally a brief document that contains basic information about your organisation. Your LLC status will be official after you submit this paperwork and gain state approval.
Make a business agreement. This is an internal document that details how the firm would split its revenues, as well as its management duties.
Obtain your EIN. A firm may create a business bank account, recruit workers, and pay taxes using an employee identification number (EIN).