Out of the countless options available to run your new business, deciding on its structure is the most crucial. One of the most popular for small businesses is the limited liability company (LLC) formation.
However, it’s essential to assess if this model is ideal for your company or one of its variations before choosing this option. This is because, once you’ve incorporated it, changing this designation is costly and complicated.
Before submitting your paperwork to register your business as an LLC, first consider the following five factors.
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1. Educate Yourself on How LLCs Work
Limited Liability Company (LLC) business structures blend advantages that corporations enjoy with additional asset protection for owners. This option allows you to file your taxes either through your personal return or as a business operation. It’s even possible to get approved for an S-Corp tax designation, which avoids federal taxation on the company and passes this burden to members via passive income and capital gains.
Below are some of the most common variations of LLC used by businesses:
Just like it sounds, this is an LLC customer where there is only one owner and no other members. Operating agreements for this structure only need to focus on it being a separate entity since no employees are involved. However, business owners need to avoid blending their personal and business assets to avoid complicated tax situations.
If you have two or more partners in your business, a multi-member LLC may be ideal. It not only recognizes the shared percentage each holds but has this ownership specified in the operating agreement, so there is no confusion in the future. Multi-member formations are taxed as business partnerships by the IRS.
If you and your siblings want to start a bakery together, a family LLC specifies that any relative can be part of the structure. The familial relationship is typically through marriage, blood, and/or adoption. Your articles of organization will specify who are controlling members of the company, and taxation is the same as that of multi-member entities.
2. What Business Insurance Does Your LLC Need?
Like any business structure, LLCs need to be insured. Your organization has some liability protections under the law, but this doesn’t cover liability issues involving property damage or workplace injuries.
Business insurance for an LLC is essential for many reasons, the most important of which is to protect your company from financially devastating risks. The threats to service continuity, employees, and even commercial property are genuine and costly if not properly defended against.
A comprehensive Business Owner Policy (BOP) consists of two or more of these coverages:
- General Liability
- Commercial Property
- Professional Liability
- Commercial Auto Insurance
- Business Interruption
- Workers’ Compensation
It’s also important to note that some business industries must carry one or more of these policies by local, state, and federal law.
3. Where Will Your LLC Operate?
You may have heard that some states are better to incorporate in than others because of the tax benefits you can receive. However, before you decide to go this route, it’s essential to understand the additional steps and ongoing compliance responsibilities you’ll be taking on by doing so.
Understanding Domestic and Foreign LLCs
The names given to these LLC structures can be misleading at first glance. Domestic companies are those operating in the state they were formed. Those that do business in a different state are considered foreign entities.
Foreign LLCs require a bit more paperwork because they typically must register in the state they operate in as well as their home state. This is necessary to ensure that your company complies with all tax and regulatory laws where it operates.
Generally, you will need to register as a foreign LLC if:
- You have a business account in that state.
- You conduct business related to your LLC there.
- You have commercial properties or assets in that state.
Every state has its own guidelines as to what denotes an LLC as foreign or domestic, so contact your Secretary of State. Also, consider researching any small business incentives available in the location you incorporate. This could be a deciding factor that makes or breaks the idea.
4. How Will You Manage Your LLC?
If you plan to create a single-member entity or an LLC with multiple members, determine your management style beforehand. Most companies with several partners that use a limited liability model will either rely on their other owners to manage things or have an outside party handle this aspect.
LLCs that are member-managed require clear operating agreements that detail the responsibilities each holds. If you and your partners decide not to manage your business personally or don’t have the skill set to do so, another company could handle this responsibility.
However, if a detailed outline of your management process isn’t clearly outlined in your operating agreement, most states will treat your LLC as a member-managed company. This could lead to future disputes between yourself and your colleagues regarding these issues.
5. Do You Need an Accountant or Commercial Attorney?
From ensuring your business accounts stay separate from personal ones, filing your tax obligations on time with the correct agencies, and having the required insurance coverage for your fleet, there are many legalities to keep track of with an LLC.
Building a relationship with a tax professional or attorney familiar with commercial law can help simplify these matters and provide sound business advice. Many of these professionals offer flat rate fees for formation filing and can recommend what entity structure is best for your company.