Although a recent addition to the options for organizing a business, the LLC is rapidly becoming an extremely popular choice for new business owners. Due to its flexibility and asset protection, this popular structural choice most likely is on your list to research. Read ahead for a detailed look into the LLC structure.
Pros and cons
Pros Most of the owners that choose the LLC structure do so to gain personal asset protection. Organizing as an LLC grants this protection, and also has the added benefit of pass-through taxation status (which means that owners are only taxed on the business’s profits at the personal income tax level). Generally, the LLC is considered a structure with very few regulatory requirements.
Cons As with any more formal corporate structure, there are ongoing requirements that an LLC must comply with. Additionally, the ownership of an LLC is must less transferable than the ownership of the corporate structures (the S corporation or C corporation).
Ownership There are typically no restrictions on who can form an LLC. However, a few states do require that an individual be at least 18 years of age to officially become an LLC owner. The owners of an LLC are commonly referred to as “members” of that business.
Business name The name you choose for your LLC is an important decision. Going forward, this name is how you will represent yourself to potential partners, associates, other business owners, and of course, clients. With that in mind, be sure to take some time to craft a name that you will be proud to tell the world.
Legally speaking, your LLC’s name must be unique (and not deceptively similar) to any other trademarked name or business. It is also required that your name not be used to intentionally misrepresent the products or services you offer. For LLCs, nearly all states will also require you to add a signifier of your limited liability status, such as “LLC” or “L.L.C.” to the end of your company’s name.
Compliance There are a few regulations that an LLC must comply with. This usually includes filing an annual report, and paying any applicable state-level taxes that are assessed yearly. It’s extremely important to be aware of the ongoing requirements of owning an LLC.
The incorporation process
Choose your state of incorporation Did you know that you can incorporate your LLC in a state other than the one in which you live, or the one in which your business will operate? Through a process called foreign qualification, you can take advantage of the incorporation perks of different state.. However, there are a few factors that should be considered before you make this decision.
If your organization is a small, focused company that is held by only a few owners, and operates in a small area, it may be advisable to file locally. The main reason for this is that many states require corporations that foreign qualify to pay additional taxes or fees that can be substantial for smaller companies. There are also some logistical issues that are related to foreign qualification that can cause unforeseen additional expenses.
If your organization is large, or operates on a grand geographical scale, foreign qualification may be the best option for your company. Each state offers different tax and filing implications, and your company may be better off establishing itself in a foreign state in order to take advantage of those benefits. Some of the most popular states in which companies typically choose to foreign qualify are Nevada, Delaware, and Wyoming.
How can I start the incorporation process? In almost all states, the process begins when a potential LLC owner files a set of documents called the Articles of Incorporation (sometimes referred to as a Certificate of Incorporation) with the state they wish to operate in. This acts as a request to be formally recognized. These documents contain basic information about the company, its owners, and its directors. This must be submitted before the company can begin operations.
In certain states (notably Arizona, New York, Nebraska, and Pennsylvania), you may be required to publish a notice of your LLC’s formation in a local newspaper.
LLCs can be organized with two different structures. The business will operate much like a general partnership or sole proprietorship if it is managed by its owners (members). If this is the case, the owners will be in charge of making all business decisions.
If the LLC will be managed by an elected set of managers (who are not members), then the business decisions will be made by these individuals. Under this structure, the business will more closely resemble a traditional corporation, with the managers acting as directors, and the owners acting as shareholders.
LLCs are typically taxed on a pass-through basis. As pass through entities, the profits and losses of LLCs are only paid out by each individual owner, and are only reflected on their personal income tax returns. However, LLCs with multiple owners must file a purely informational tax return for their business, while LLCs held by one member do not.
Some LLCs can, and do, elect to be taxed more like corporations, which eliminates pass through taxation. Also, some states do not recognize the LLC structure for tax purposes, and have their own tax laws that apply to companies that adopt this structure.
It should also be noted that several states also impose a franchise tax on all LLCs that can range from $100 to $800, depending on where you have formed your business. These taxes are typically due on an annual basis and must be paid in order to keep you business in compliance with the state. Failure to pay the imposed franchise tax can lead to the forfeiture of your right to conduct business in your state.
Swyft can help!
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