When we started our businesses, we asked ourselves hundreds of questions like, what are we going to sell? How are we going to price it? How are we going to make this business profitable? But, often one of those nagging questions in the back of your mind is probably about an LLC. You’ve heard it many times. You’ve seen it before, but it can sometimes be that mythical thing that we just don’t quite get around to. Or maybe we have one and we don’t quite understand why.
Well, this episode is going to be just for you, because I am going to walk you through why an LLC is truly worth all of the hype and how forming one could set a strong legal foundation for raising a successful business from the ground up.
LLC is Worth All of the Hype
A limited liability company provides you liability protection, management, flexibility because I know you want to grow your team. I can’t say enough about the tax advantages. It’s that necessary evil that unfortunately we do need to plan for. Having an LLC can give you multiple options.
Now, with just this brief mention, you might be thinking to yourself that an LLC sounds like a good fit for you, but you wonder when is the right time to form an LLC? I’m here to tell you that really the answer is the sooner the better. But, the trigger that I generally like to use is when you start interacting with other people or other businesses around your offering. When we are working in a vacuum in our home and we’re not talking to anyone and we’re not signing up for any services, it’s an idea and it’s allowed to be an idea for that period of time. When you start going out into the world and your business is creating ripples into the world and making an impact and not necessarily earning you money, right? You might be paying someone for their support in branding. You might be getting help creating a website. You are actually taking actions within your ownership of a business. At that point, I really do believe that having an LLC is right for you because at the end of the day, an LLC protects your personal liability should your company face any debts or lawsuits.
The moment and we don’t like to think of it this way, that we start interacting with others. The opportunity for debts and lawsuits starts. That means if the business can’t pay a creditor your personal possessions, your house, your car will not be taken away to pay off the debt, you are creating a separate entity outside of yourself and your family unit where the business, its actions, its debts, its income can live.
Before we move forward, I do want to touch on why there is additional flexibility offered to you with an LLC compared to corporations, because I think we are so familiar with seeing Inc. and INC and we feel like that’s how you make it big is by being a corporation. However, there are many large organizations that are formed with an LLC, so let’s touch on the flexibilities of owning an LLC.
There are no restrictions on the number type, whether it’s entity or individuals or locations of business owners. Sometimes people think, well, if we don’t all live together or and there are multiple people who may be from different states that we can’t possibly form an LLC, we probably need a corporation. We probably need that bigger thing. That sounds scarier because this seems complicated to me. I’m here to tell you that, no, an LLC is a vehicle that is that flexible, that there are no restrictions on the number, the type, or location of the business owners. If you have multiple business owners or you may in the future, your company can manage the owner’s rights and obligations in an operating agreement, which means that you can establish how the members will run the business day to day and make important decisions. You can describe the ownership percentages of each member, the voting rights, their obligations to each member, the obligations of each member to the business and to each other.
And then, of course, how you can bring on new members or sell membership interests. And last but not least is you have the flexibility to decide how your company will pay its taxes, which is in fact a great incentive since there isn’t a separate tax bracket for ELSS, you can be taxed as a sole proprietorship, a partnership, or an S corporation. The good news is that it means you can avoid the double taxation that corporations have to pay. As an LLC, you actually get to take advantage of what we call pass-through taxation, which I’ve broken down for you specifically on whether or not you are a single-member LLC like myself or you are a multi-member LLC. If you are a single-member LLC, you report your business profits and losses on your personal income taxes. If you are a multi-member LLC, each member reports their percentage of the profits or losses on their personal tax return, which is established in your company’s operating agreement. Now generally we focus on profits, but I want to remind you that it is both the split of profits and losses that you can specify in your operating agreement. Losses can and should be a separate consideration in the operating room because losses may benefit one member more than another if you are a licensed professional. I want to add one quick layer for you. Yes. If you’re a doctor, a lawyer, a CPA, you may be asking if you should form a professional LLC, a P LLC. This is an entity type designated for licensed professionals recognized by their state. HPLC offers the same liability protection for members as an LLC. Regarding creditors, however, you are still subject to malpractice claims. Now, when it comes to implementing everything I just shared with you thus far, there is one thing I want to add.
You must file your LLC anywhere you are, quote-unquote doing business from your business where your LLC is based to avoid additional fees.
Tip number one, you are most commonly your own registered agent or statutory agent, depending on the lingo that your state uses. Unless you file in another state, then you will need to designate a local registered agent to receive your service of process notices and other official government notices. That’s why I said by forming your business, where you are based, where you can serve as your own registered agent, you can void additional fees.
Tip number two, this information is public in most states. So consider the addressee or listing. I suggest a business or mailing address whenever possible, and I would dissuade you from using a P.O. box because there are actually several things that you can’t use a P.O. box for, which could complicate getting all of your mail sent to one place.
If you are in fact going to file in a state outside of where you live and where your business is based, maybe because you’re doing business in multiple states, just be sure that you are filing what is called a foreign LLC to carry on business in those states. Generally, the signs of doing business in another state are physical locations like an office, a store, a warehouse, employees working in the state as opposed to independent contractors. You regularly meet with clients or perform services in this state. Don’t worry, phone meetings and email alone is less likely to rise to the level of doing business.
If that state is a significant source of your revenue streams as opposed to one of the isolated transactions. Once your LLC is approved, your business will have what is called articles of organization. This is something that you hear often, but just remember, this is different than an operating agreement. An operating agreement is what we talked about as a benefit to someone who has multiple owners in their business. An operating agreement is something that is going to set the tone. For your day to day and those pivotal decisions on that note, I do want to mention our team has created an operating agreement that can be tailored to specifically reflect your intentions and establish clear expectations to guide the behind the scenes of your business with this template, not only will we cue you for all of the specifics so that you can customize the template in minutes. And with the help of our video tutorials and implementation guide, we will provide priceless peace of mind.
Before we sign off, I do want to mention your iron, and I want to make sure that you don’t get caught in the trap of paying a fee for your iron, because, in fact, it is something that you can get it from the IRS dot gov website for free. Most banks require you to have an iron to open your business bank account. And further, it helps you separate your personal and business finances. Number two, it adds credibility to your business. Vendors, banks, and even customers you do business with will take your business more seriously when you have a separate bank account for your business. For example, for my Verizon phone bill, I had to provide my articles of organization right after I filed my LLC, I had my articles of organization and my iron. And you can actually file your iron immediately after you file, not get approved, but file for your LLC so you can do it in one sitting. So you’re going to go to either your Corporation Commission website for your state or your secretary of state’s office. The best way to decide which one is right for you based on your state is to type file an LLC and then your state name. Look for a dot gov website. Again, it’s going to be either your secretary of state’s office or your corporation commission. After you have submitted that filing, you will actually be able to go to the IRS dot gov website and file your iron for free and you will get your iron immediately.
If you have any questions regarding transitioning or forming an LLC, head to our private Facebook community where we will have the conversation already started and ready for you to jump in.