People always ask: What form or structure should I choose for my small business? With new business registrations on the rise according to government data, there are numerous factors to consider. It often leads to the conclusion that forming an LLC is the most desirable and most common solution.
In the US, it is possible to start and operate a business as a sole proprietor, a partnership, a limited liability company (LLC), or a corporation. In a sole proprietorship and a partnership, the owner(s) are responsible for all profits, losses, and liabilities. A corporation is too complex for a small business. This is why many people prefer to register their small business as an LLC. Many use free guides such as TRUiC (The Really Useful Information Company) to save on costs, with some paying rather high fees to let lawyers and CPAs take care of the incorporation process.
Start of the new year is a popular time for new businesses to form
Apparently, the Secretary of State offices throughout the US process the majority of incorporation paperwork in the first quarter of the year. Why? During the winter months, most people choose “starting a business” as a new year’s resolution. Most entrepreneurs begin the process of forming a business in the first few months of the new year; this also gives new businesses a longer time before filing taxes. They draft a comprehensive business plan, incorporate the LLC, apply for business licenses and trademarks, and file any other required registration papers. By spring, they are ready to start operating.
Why an LLC is one of the popular ways of starting a business
A limited liability company is a hybrid between a partnership and a corporation. Profits, losses, and taxes are assessed to individual members just like in a partnership. Personal liability of the owners is limited just like in a corporation, and this is a major reason why it is popular.
Another reason for an LLC’s popularity is that it is very flexible and can be used for a wide variety of businesses. The members can make it as simple or complex as they desire within state law guidelines.
Why should small businesses have an operating agreement?
An LLC operating agreement is highly recommended as it is a legal document that summarizes the ownership and the financial and working relations between the members and between members and managers. The form and content vary a lot, but the following sections are common: Organization, Capital Contributions, Management, Voting, Profit Distributions, Membership Changes, and Dissolution. The agreement can be updated at any time through an agreed process.
State laws in New York, California, Nebraska, Delaware, Maine, and Missouri require all LLCs to have an operating agreement. Other states don’t legally require it, but it is strongly advisable to have one.
How to protect your small business
Starting a business involves many tasks to get the business off the ground; however, don’t forget to manage business risks. General liability insurance for the LLC is a good way to manage some of these risks. Consider how to protect your data online, guard ideas and inventions from theft, guard assets against physical theft and damage, protect the business from credit fraud, and avoid doing business with customers who have a bad credit record. You must also manage the business’s credit to make sure it can pay what it owes when it’s due.
An LLC protects personal liability when starting a small business.
Depending on the state in which you incorporate, your LLC will limit personal liabilities of all members, some members, or none of the members. If your business fails to pay its creditors for whatever reason, foreseen and unforeseen, your personal assets are not at risk providing no fraud was committed. The company is liable and its assets may be sold off to pay off the creditors. This is how you are protected by law.
Should you form an LLC when starting a business?
There are two reasons why you should register your business as an LLC right from the beginning. First, you will want consistency, especially when dealing with tax issues and branding over the first few years. Secondly, the chances of the business failing in the first few years is high, and you want to protect yourself from liability.
How to form an LLC
The process of forming an LLC is pretty standard.
1. Pick a name. You will want the name to be simple, memorable, suggest important qualities about the business, and inspire people to buy your products and services. Also, make sure the suggested names follow the state laws and is available in your state. Have several of these in order of preference.
You may also want search the Federal trademark Database to see if the trademark is available.
2. Select a Registered Agent to receive paperwork from the state for your LLC. You can do this yourself or use a registered agent service.
3. Complete and file the Articles of Organization to form your LLC. In many states, this can be done online.
4. Some States such as New York and Arizona have publishing requirements that need to be met.
5. Once the business is registered, you can go ahead and sign the operating agreement, apply for the tax number, and open a business bank account.