The limited liability company, or LLC, is a hybrid business structure that provides the benefits of keeping personal assets separate from business assets while also permitting some flexibility for members.
An LLC is especially useful for small businesses and startups because it offers them protection from personal liability without requiring them to operate as a corporation.
Many small business owners use an LLC as their primary business structure; however, many different forms of business can meet your needs and objectives.
If you’re thinking about forming an LLC or any other type of corporation, partnership, or sole proprietorship, you’ll need to answer some important questions about where you live, how you will be using your business entity, and how your company will be funded.
Read on to find out what you should know before deciding which type of company is right for you. Here are three questions to ask before forming an LLC:
Where Do You Live?
If you’re planning to form an LLC in California, New York, or another state that doesn’t recognize a single-member LLC, you might be better off forming a one-person corporation.
If you’re unsure, however, you can always consult an attorney to help you make the right choice. If you’re forming an LLC in a state that recognizes single-member LLCs, you should take note of the state’s statutes of limitation, which are the amount of time that passes before a creditor can no longer make a claim against you for a pre-existing debt.
Some states have a short statute of limitation for single-member LLCs, which might make it more difficult to protect your personal assets.
How Will Your Company Be Used?
The primary difference between single-member and multi-member LLCs is the amount of liability protection each provides for its members.
A single-member LLC shields its owner from personal liability for business debts, just as a multi-member LLC does. However, because there’s only one owner, a single-member LLC can’t take on new members or investors.
A multi-member LLC provides its members with the same level of liability protection as a single-member LLC, but it also allows members to expand their business by taking in new partners.
If you plan to take on investors, or if your business will need to take out a loan, a multi-member LLC might be a better option. However, if you are not expecting to add members or borrow any money, a single-member LLC is a simpler option.
How Will Your Company Be Funded?
One of the major benefits of forming an LLC is that members are not liable for each other’s debts, so every member doesn’t need to contribute an equal amount every month.
A sole proprietorship, a partnership, and a limited partnership are more like a group of friends or colleagues who decide to work together; their members are jointly and individually responsible for the company’s debts.
A corporation, on the other hand, is treated as a distinct legal entity, allowing it to raise capital by issuing shares of stock. An LLC falls somewhere in between these two models.
The owners of an LLC are responsible for the company’s debt. But they can also choose to draw up an operating agreement that outlines how management and profits will be distributed.
When Is the Right Time to Form an LLC?
Before you form an LLC, you’ll need to make sure that it’s a suitable business structure for your situation. If you’re planning to launch a new company, you’ll want to look into forming an LLC as soon as possible. The sooner you get your
business structure in place, the sooner you can start marketing your product or service, collecting revenue, and protecting yourself against personal liability. There is no specific time of year you have to form an LLC.
However, if you’re planning to start a seasonal business, you’ll want to make sure that you form your LLC during the season when your business is open to ensure that it is properly set up.
When Should You NOT Form an LLC?
Just as there are times when you should form an LLC, there are times when you should NOT form an LLC. If you don’t have a legitimate business idea that would generate revenue, or if you don’t have a clear path to turning a profit, an LLC is not the right choice for you.
Similarly, if you anticipate earning less than $100 per year from your business, you don’t need to form an LLC—you can just operate as a sole proprietorship.
If you don’t have the money to pay the initial fees associated with forming an LLC (typically $1,000 or more), you’ll likely want to hold off on forming an LLC until you’ve saved up the necessary funds. You can’t form a free LLC; let no one deceive you on that. You must spend money to file your LLC.
When you’re considering which type of company is right for you, the most important thing is to make sure that the structure you choose is the right fit for your business.
While an LLC is one of the most common types of companies, it’s not the right fit for every entrepreneur. To make sure that you’re making the right choice, start by asking yourself three important questions:
Where do you live? How will your company be used? And how will your company be funded? Only once you’ve answered these questions can you make an informed decision about which type of company is right for you.