Startup Structuring: How Forming an LLC Sets the Stage for Excellence

When you start a new business, there are countless exciting decisions to make. You get to pick a business name, a tagline, and colors for your website. You’ll also get to make integral decisions about your product portfolio, and about outreach to potential customers.

One of the most formative decisions you’ll make is which legal structure to choose for your business. While this may not sound flashy or exciting, it can have a huge long-tail impact on the financial standing of your business, including your tax requirements.

Which legal structure is best for your business? While there are merits to Sole Proprietorships, Partnerships, and Corporations, a majority of small business startups benefit from the LLC structure. This post will explain why.

LLCs: A Quick Overview

LLC stands for Limited Liability Company. The LLC format has been around since the 1970s, where it was developed as a legal structure for real estate companies. Today, LLCs are popular among business owners in virtually every industry and vertical.

To understand what makes an LLC unique, it’s first important to understand the default option for small business startups. When you start generating income on the basis of self-employed activity (basically, when you go into business for yourself), you’re automatically classified as a Sole Proprietor.

Sole Proprietorships do not acknowledge any distinction between business and owner. In other words, you can’t separate your personal liabilities from your business liabilities. The same goes for your assets. This exposes you to personal loss should your business ever be sued… and given the litigious environment in which most startups operate, that’s a big problem.

There are other elements of a Sole Proprietorship that make it prohibitive to business growth, including complications bringing employees on board. For this reason, many startup entrepreneurs opt into the LLC format.

By registering your company as an LLC, you actually do create a new legal entity. This allows you to keep personal assets and liabilities in one pot, business assets and liabilities in another. And it opens the door to a wide range of other benefits, all of which can establish a firm foundation for startup success.

How Can an LLC Help Your Startup Succeed?

There are a number of ways in which registering as an LLC can benefit your small business startup.

Protections Against Lawsuits and Creditors

One of the most significant benefits of the LLC is that it helps protect personal wealth from litigators and creditors.

Basically, if someone comes after your business, they can only make a claim to your business assets, not things like your house, your retirement account, or your family’s nest egg. This allows you to invest in your startup with greater peace of mind, and to have some safeguards against the volatile, litigious world of entrepreneurship.

Increased Credibility

Not just anyone can start an LLC. There’s a whole legal process you have to carry out. Doing so proves that your business is serious, not a side hustle or a lark.

This automatically bestows credibility on your startup, and might make it easier to earn the trust of investors, venture capitalists, or lenders…. To say nothing of potential customers, clients, employees, and partners.

Multiple Tax Options

LLCs also give you some leeway with respect to how you report to the IRS.

By default, LLCs report on a pass-through basis, declaring profits and losses on a personal tax return and paying the personal tax rate. But corporate taxation is always an option, should you decide that’s more advantageous for your business. A tax professional can help you determine the best way forward; the important thing is that an LLC gives you some flexibility.

Administrative Ease

One final reason why so many entrepreneurs choose the LLC format: Built-in flexibility.

Creating an LLC does require you to fulfill a few legal requirements, but the process is fairly streamlined overall. And once the LLC has been registered, you’ll have a lot of options for how you structure your management team day to day. Simply put, LLCs are easier to run than Corporations (by a longshot).

Registering Your Startup as an LLC

The actual requirements for registering an LLC are different from one state to the next. Starting an LLC in New York is not quite the same as starting one in Texas. Generally speaking, though, the process looks like this:

• Choose a name for your LLC. You’ll need to ensure a name that hasn’t already been taken by another LLC in your start.
• Select a Registered Agent. You’ll need someone who is formally tasked with receiving legal documents and tax correspondence on the business’ behalf. Tip: You can hire a third-party Registered Agent service, often for less than $100 a year.
• File your paperwork. You’ll need to create an Operating Agreement, which functions as a charter for your business. You’ll also need to file Articles of Organization with your state, paying the filing fee in the process.
• Claim an EIN. You can get an Employer Identification Number from the IRS. If you’re a US resident, you can get an EIN for free.
• Set up a bank account. For an LLC, it’s important to have a business bank account that’s not connected to any of your personal accounts.
• Keep up with filing requirements. You may need to re-register on an annual basis, and also keep the state up to date on your Registered Agent. Report any changes of Agent, or changes of your Agent’s contact information.

Register Your Startup as an LLC

As you seek to position your startup for lasting success, the legal structure you choose is essential. Choosing the LLC format may be one of the smartest decisions you make as you try to create a firm foundation for your new business.