What Kind of Companies Should Form LLCs?
No matter what kind of business you’re starting, you’ll eventually need to make a decision about your legal structure. It’s possible to run your company as a Sole Proprietorship or a Partnership, two options that are easy to set up but offer limited legal protection. By contrast, a Corporation is harder to establish, and also comes with a greater level of regulatory overhead.
For many entrepreneurs, the limited liability company (LLC) provides a middle ground. The LLC structure works well for businesses across a range of different industries. In this post, we’ll denote some of the situations in which starting an LLC might be especially helpful.
Reasons to Form an LLC
1) Companies that need to launch in a hurry.
Whether you’re forming an LLC in California, Texas, or Illinois, you’ll find that the process is remarkably expedient and straightforward. If you’re eager to get your new company up and running without a lengthy bureaucratic delay, the LLC structure may be your best bet.
In fact, most states simply require you to fill out some preliminary paperwork, file online, and pay a small fee. You could ostensibly complete the entire process in just a couple of hours, after which you’ll simply need to tie up a few loose ends like claiming an EIN and opening a bank account.
2) Companies that face liability concerns.
One of the primary reasons to choose the LLC structure is that it limits your legal exposure, keeping your personal assets and your business assets separate. What this means in practice is that if somebody brings a lawsuit against your LLC, they won’t be able to come after your family car or your personal bank accounts.
In determining what type of legal structure to choose, ask yourself whether your company is in a particularly litigious or lawsuit-prone industry. If the answer is yes, then you may want to safeguard your business with an LLC structure.
3) Companies that need tax flexibility.
The legal structure you choose for your business will have a number of significant implications, foremost among them tax implications.
When you choose an LLC, your default standing with the IRS will be as a “pass through,” meaning profits are taxed on your personal tax returns. This allows you to avoid the double taxation that many Corporations face. However, you can also elect to be taxed on a corporate level, should this be desirable for any reason.
This level of flexibility is unique to the LLC structure, and is a major part of its appeal.
4) Companies that desire some management leeway.
How do you want your new business to be run on a day-to-day basis? Again, choosing the LLC structure provides you with some built-in wiggle room. An LLC may be run by its own members, or by an external manager who is brought in.
This isn’t true with Corporations, for example, which face some strict legal requirements for who can and cannot handle day-to-day administration. This makes LLCs a good option for companies that haven’t yet settled on a management strategy, or that want to leave the door open to reverse course later on.
5) Companies looking to convey authority and professionalism.
When you run your company as a Sole Proprietorship or a Partnership, there is no legal distinction between the business and the business owner. So, for example, when customers want to pay, they make their payments directly to you.
There’s nothing wrong with any of this, but some entrepreneurs may desire to project a greater sense of professionalism. To conduct your affairs in the manner of a more established and reputable business, the LLC structure may be best.
6) Companies looking to take out small business loans.
Many fledgling companies need an infusion of cash, which could potentially come in the form of a small business loan. Here is another area where LLCs have an advantage over Sole Proprietorships and Partnerships, as many lenders do not want to loan money to these latter entities. Also note that when lenders are willing to work with Sole Proprietorships and Partnerships, there is typically a tight limit.
It’s worth noting that one area where LLCs are not well-suited is in attracting investors and venture capitalists. If that’s something you wish to do at your business, it may make more sense to choose a corporate structure.
7) Companies that are zealous to protect their name.
Here’s another perk to the LLC structure: When you start an LLC, you have to give it a name that hasn’t already been claimed by another business in your state. For those with established businesses, this provides an important safeguard, ensuring that your brand identity won’t be diluted by some other LLC adopting the same name.
There are some limitations to consider: For instance, most states require that LLCs include “LLC” or “limited liability company” somewhere in their name. However, registering a DBA (doing business as) can allow you some flexibility in terms of how you present yourself to the public.
Should You Run Your Business as an LLC?
Ultimately, running your business as an LLC provides myriad benefits, ranging from tax flexibility to personal liability protections. This doesn’t make it the best option for every startup, necessarily, but it does mean that the LLC structure is advantageous for businesses of all kinds, in virtually every industry.
Before deciding on the right legal structure for your business, do your due diligence in learning more about how LLCs compare with other options. With additional questions, talk with a seasoned business attorney in your community such as Xu Law Group. Contact us today with your LLC related questions.
Author Bio
Amanda E. Clark is a contributing writer to LLC University. She is a graduate of Eastern Michigan University and holds degrees in Journalism, Political Science, and English. She became a professional writer in 2008 and has led marketing and advertising initiatives for several Fortune 500 companies. She has appeared as a subject matter expert on panels about content and social media marketing. She regularly leads seminars and training sessions on trends and tactics in professional writing.