Is an LLC the right entity choice for your business?
Answering the 10 simple questions below can help you find if the LLC is the right entity for you:
1. Would you like to limit your personal liability for business debts and obligations?
No one wants to risk getting sued — and certain industry types, like construction and real estate investment, are particularly susceptible to lawsuits. For example, a dissatisfied homeowner might sue a flooring contractor, or a litigious tenant might file claims against a landlord. Of course, no industry is immune to lawsuits. If you want to protect your personal assets from business-related legal actions, an LLC can be a good choice. If an LLC is sued or takes on debt, members’ personal assets are not at risk, in most cases. However, if you or other owners are engaged in wrongful or illegal acts, the owners can lose the liability protection afforded by the LLC.
2. How many people will own your business?
Sole proprietorships can have only one owner. Partnerships must have two or more owners. S-corps may have no more than 100 owners. However, LLCs give you the unique ability to create a business with just one owner, or an unlimited number of owners. You may also designate a business as the owner of your LLC.
3. Do you want your business to continue existing if one or more owners leave?
If your answer is “yes,” be sure to check your state’s requirements, and specify this condition in your Operating Agreement. In some states, LLCs automatically dissolve after a member departs (unless the company’s governing documents state otherwise), requiring the remaining members to execute steps to close the business.
4. Will your business sell shares of stock to investors, now or in the future?
If so, you may wish to form a corporation instead of an LLC. If your primary interest is assigning specific ownership and profit distributions to different individuals or members, LLCs allow you to do this within your Operating Agreement. However, if you would like the ability to add new owners or change ownership percentages by selling shares of stock, you need to form a corporation.
5. Would you like to avoid the formality of holding annual meetings or recording meeting minutes?
Corporations require more formalities and must follow stricter regulations than LLCs. They must create and maintain bylaws, hold initial and annual meetings attended by directors and shareholders, document all meeting minutes, issue stocks, and record all stock transfers. If you wish to eliminate these formalities, you may appreciate the relative ease of an LLC.
6. Would you like your business income to be taxed separately from your personal income?
If so, you’ll need to avoid a sole proprietorship and select either an LLC or a corporation. All corporations pay taxes on corporate income. However, LLCs have a bit more choice in the matter. You may elect to be taxed as a corporation, which is the default filing for most LLCs. If you qualify, you may be able to file as an S-corp and choose pass-through taxation, in which profits and losses are reported on the owners’ personal tax return, and paid for by the owners. Read our article on S-corporations. You may wish to consult with your tax advisor or attorney regarding the best choice for your new business.
7. Are any of your business’s owners non-U.S. citizens?
If you’re not a U.S. citizen, you are not eligible to own an S-corp — however, you may own an LLC.
8. Would you like your business to receive funding from venture capitalists or banks?
If so, you may wish to choose a corporation rather than an LLC. Banks and venture capitalists may prefer or even require formal incorporation in order to fund companies.
9. Do you need a state license to operate your business?
Businesses that provide professional services, such as accounting companies, legal firms, and medical providers, may have specific state requirements regarding business structures. In some cases, you may be able to form a PLLC, or Professional Limited Liability Company. If your business requires state licensing, we recommend consulting an attorney for further guidance.
