LLC or Sole Proprietorship? Incorporating Your Small Business
In planning to start your company, one of the most important choices youÃÂÃÂll face is what business structure to use.ÃÂÃÂ In many countries, it is only possible to use structures such as corporations, partnerships, and sole-proprietorships.ÃÂÃÂ However, in the United States, people have the opportunity to form a limited liability company.
Advantages of LLCs
Limited liability companies, or LLCs, combine several aspects of corporations and partnerships, but have certain advantages that neither possess.ÃÂÃÂ An LLC can have an unlimited number of owners, called members.ÃÂÃÂ These members can be individuals, corporations, or other LLCs.ÃÂÃÂ LLCs, like corporations, have liability protection, meaning that members cannot be held responsible for debts, unless they have signed personal guarantees.ÃÂÃÂ Because of these similarities, LLCs are sometimes called limited liability corporations, but the correct term is ÃÂÃÂcompanyÃÂÃÂ.?ÃÂÃÂ With a limited liability company, profits can be distributed in various ways.ÃÂÃÂ This is much more flexible than in common partnerships, which require that profits be distributed evenly.ÃÂÃÂ In an LLC, all profits, losses, and expenses flow through the company, directly to its members.ÃÂÃÂ This will allow you to avoid being taxed twice by paying corporate, then individual income tax.ÃÂÃÂ For tax purposes, LLCs can be classified federally as corporations, partnerships, or sole-proprietorships.ÃÂÃÂ Defaults may apply, or classifications can be selected.
Another benefit of the LLC business structure is that, unlike corporations, LLCs are not required to keep formal minutes, hold meetings, or record resolutions, making them much simpler to own and operate.
Drawbacks of LLCs
An LLC is easier to form than a corporation, but it still involves much more involvement and paperwork than a sole-proprietorship or a partnership.ÃÂÃÂ While a corporation might last forever, LLCs cease to exist if any of their members die or go bankrupt.ÃÂÃÂ Entrepreneurs with plans to issue employee shares in the future, or take their company public, would be better served with a corporate business structure.
How to Set Up an LLC
It is now possible to set up an LLC in any of the 50 states.ÃÂÃÂ ItÃÂÃÂs not as simple as forming a sole proprietorship, but it is much easier to do than creating a corporation.ÃÂÃÂ To form an LLC, you must file articles of organization with the office of the Secretary of State and pay the necessary fees.ÃÂÃÂ You can have the articles created by a lawyer, or you can prepare and file them yourself.ÃÂÃÂ ?ÃÂÃÂ Most states donÃÂÃÂt require it, but it is best to draft an operating agreement.ÃÂÃÂ Operating agreements can help establish company profit sharing, responsibilities, ownership, and changes in ownership.
All companiesÃÂÃÂ situations are not the same, and the rules for forming LLCs differ from state to state.ÃÂÃÂ In North Dakota, for example, foreign LLCs are not allowed to participate in banking or agriculture.ÃÂÃÂ Some states require that a notice of company formation be published in the local newspaper.ÃÂÃÂ Check with your state government to see what their policies are.?ÃÂÃÂ This article should provide you with the basics of LLCs, but it is best to seek legal and tax council to see what option will best fulfill your needs.