You’ve made the decision to start a new business - congratulations! You have likely already been running your business as a “side gig” or even a “hobby,” but now you want to move ahead and focus on building your venture.
Do you need to incorporate right now? The short answer is yes.
The very beginning of starting a business may include registering for a DBA (Doing Business As), but this is not a legal business entity and provides no liability protection at all. If you want to protect your personal assets (including your home) from any legal disputes that stem from your business, you need to incorporate.
If you don’t already know, you have a few options, the main choice being an INC or LLC. LLCs are far less structured than a corporation and provide a number of benefits for new business owners. But depending on your type of business, the drawback may be deal breakers.
Learn how to form an LLC in your state:
Alabama Alaska Arizona Arkansas\n\nCalifornia Colorado Connecticut Delaware\n\nD.C. Florida Georgia Hawaii\n \nIdaho Illinois Indiana Iowa\n\nKansas Kentucky Louisiana Maine\n\nMaryland Massachusetts Michigan Minnesota\n\nMississippi Missouri Montana Nebraska\n\nNevada New Hampshire New Jersey New Mexico\n\nNew York North Carolina North Dakota Ohio\n\nOklahoma Oregon Pennsylvania Rhode Island\n\nSouth Carolina South Dakota Tennessee Texas\n \nUtah Vermont Virginia Washington\n\nWest Virginia Wisconsin Wyoming\n\nImportant Notes:
- LLC stands for “Limited Liability Company.”
- Instead of owners, LLCs have members (and sometimes managers).
- LLCs are also known as “pass-through” entities since all income flows directly to the owner(s).
- LLCs do not have to pay a federal corporate tax.
- An LLC can have only one owner/member.\n\n
Advantages of an LLC
There are a number of benefits to having an LLC, including liability protection and a relaxed management structure. The recent changes in taxes have provided a few more perks for small business owners.\n\n
Liability Protection
Creating a legal business entity like an LLC also creates a separation between your business assets and your personal assets. This is sometimes referred to as a “corporate veil” in regard to traditional corporations, but the general definition also applies to LLCs.
If for any reason, you are unable to pay a debt or legal action is brought against your business, the creditor/plaintiff cannot come after your personal assets (home, vehicle, possessions). This protection does not apply, however, if the legal dispute involves negligence on the part of the business owner.\n\n
Tax Benefits
Other than the liability protection, the other most distinct benefit of forming an LLC is the tax benefits. Traditional corporations are required to pay a federal (and sometimes state) corporate tax on company revenue before any salaries are paid — in a sense, corporate owners are taxed twice because they still pay personal income tax on their salary.
But with the LLC business structure, all income passes through the business directly to the owners/members. This means that, unless the state levies a tax for LLCs, the members are only required to pay federal income taxes on the earnings. Additionally, there is no specific federal tax for LLCs other than self-employment tax.
The recently overhauled tax plan provides LLC owners with a number of new and updated tax benefits, specifically a 20% tax deduction on business income, better/updated terms for equipment deductions, and a family-leave credit. The changes brought by the Trump Tax Plan may provide extra help for small businesses.\n\n
Fewer Regulations
Another perk for LLCs is that they have fewer regulations to follow than traditional corporations. The tax responsibilities are much less complex and there is far less paperwork involved, as well as fewer records that helices are acquired by to keep.
Part of the reason for the lower oversight is that LLCs do not have shareholders to answer to. Because traditional corporations are allowed to sell stocks/shares, they must be accountable for almost every action/decision that the company makes. Corporations are required to maintain records for 7 years at a time, in addition to keeping track of share purchases and maintaining shareholder policies.\n
Relaxed Ownership/Management Structure
LLCs are not required to have the same type of ownership structure as traditional corporations — no board of directors or shareholders to contend with. many LLC businesses again as sole proprietorships or Partnerships where there is only one or a few owners making decisions. Additionally, because LLCs are not required to have directors or shareholders, the members or manager can make decisions without any added oversight.
LLCs generally have two types of management structures: member-managed or manager-managed. With a member-managed LLC the members are actively involved in running the business and making necessary decisions for the business. With a manager-managed LLC, the manager is handling daily operations and making the majority of business decisions and the members are generally more like investors with only passive involvement.\n\n
Disadvantages of an LLC
While there are certainly a number of benefits to choosing an LLC, it is not necessarily a one-size-fits-all business entity. Depending on the type of business you are forming, the LLC structure may not be the best fit for you.\n\n
Not Preferred by Investors
Mostly because the relaxed structure of the LLC, this particular business entity is not a preferred choice for investors. Many venture capitalist prefer companies that allow investment without the added responsibilities of partnership.
Also, there are laws in place that may prevent investors who manage funds to even be able to invest in an LLC. And lastly, Most investors prefer stocks to outright ownership percentage in a business — Their goal is to make your money back without too much involvement in a business. Because most investors tend to shy away from LLCs, this can make it difficult for new business start-ups to raise the necessary capital to continue the venture.\n\n
Difficulty Separating Expenses
Having fewer compliance laws for a business can be a pro and a con. Since LLC business owners are not required to keep the same type of records and have more relaxed tax requirements, this can sometimes lead to problems in adhering to any necessary regulation and keeping personal and business expenses separate.\n\n
Publication Requirements
Not every state levies new LLCs with a publication requirement, but it is still an expensive and complicated process that only LLC owners experience. The list below is an example of application requirements for any new LLC formed in the state of New York.
New York Publication Requirements
- LLC owner must publish a notice of formation
- The notice runs for six consecutive weeks
- The notice must be published in two different newspapers (one daily and one weekly)
- The county clerk chooses the newspapers (rates vary $200 — $1,500)
- The LLC owner must obtain a Certificate of Publication ($50 fee)\n\n
And the Winner Is…
Like any other business entity option, there are certainly plenty of benefits in choosing an LLC. but the final determination should be what is best for your particular business. If you have a startup and are hoping to pass your investors, you may consider a traditional corporation instead. however, if you are new to the business world and not looking for outside investment, you may find that the LLC is the most agreeable option for you and your new venture.
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- Forming a C Corp: Pros and Cons
- Forming a Sole Proprietorship: Pros and Cons