5 Important Conside...
5 Important Considerations Before You Form An LLC
5 Important Considerations Before You Form An LLC
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Joined: 2021-11-26
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If you're like most business owners, you created your business because it's something you enjoy and something you're good at doing, not because you love dealing with complicated laws.  
Unfortunately, legal decisions face almost every business owner. You probably maintain current business insurance to protect yourself and your business from lawsuits, but there is more you need to be doing to make sure your personal assets stay separate and safe.  
Forming a limited liability company (LLC) is one way to do this, and it also brings you a EIN number for LLC of tax benefits, too. Many small businesses ultimately choose to form an LLC because it's very easy and affordable, and it offers many benefits for small owners and entrepreneurs.  
Still, this entity choice is not the best fit for every business, so here are 5 things to consider first. 1. What is an LLC? There are many business entities to choose from today, including the basic sole proprietorship, a partnership, a corporation or an LLC.  
Each has advantages and disadvantages. Think of an LLC as a hybrid, because it combines features of both a partnership and a corporation. LLCs are pass-through entities by default, meaning income will only be taxed once it's passed to individual members, or owners, not at the business level.  
Corporations, meanwhile, are subjected to double taxation. This means income is taxed first at the business level, and again once it's distributed to owners. 2. What are the benefits of an LLC? LLCs are the entity of choice for small businesses because they offer more flexibility than any other.  
You can choose how you want to structure and manage your LLC, how it will be taxed and even how you distribute profits. When you form an LLC, you will still enjoy limited liability, which means personal assets are separated from the business and they will be safe if your business is sued or accumulates a great deal of debt.  
3. What are the disadvantages of an LLC? As you learn how to incorporate a business or form an LLC, you'll find there are some disadvantages you need to keep in mind. LLCs with a single member will automatically be taxed by the IRS as a sole proprietorship.  
You cannot pay yourself wages as a member and each member's share of the business profits becomes taxable income, even if that individual's share is not distributed. 4. Which businesses work best as an LLC? Not all businesses are designed to operate as a limited liability company and, while it's a perfect solution for many, it's not a one-size-fits-all option. If you're going to take your company public in the future, you may want to learn how to incorporate a business instead because converting your LLC to a corporation will be expensive in terms of taxation later on. If you want to bring on investors, remember that most will not invest in an LLC due to tax restrictions.  
5. It's easy to form an LLC It's actually easier to form an LLC than you may think. There are just a few basic steps, starting with choosing a state. Many businesses choose to form a Delaware LLC because this state is the most affordable, but you may be better off forming your LLC in your own state.  
You'll also need to choose an available name, decide how to manage the LLC and then file your Articles of Incorporation with the secretary of state. From there, you'll want to draft an operating agreement which, while not required, helps form the foundation of your business and avoid issues later on.   
Christine Layton writes for USA Corporate Services, Inc, which helps business owners or incorporate anywhere in the United States.  



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