7 Things to Consider Before Forming an LLC
Given the options that an entrepreneur has when thinking of starting a business, you should make sure that the structure you choose suits the needs of your company. One of the structures that many business owners consider is the limited liability company (LLC). You should think carefully before forming an LLC.
After all, you cannot easily change your decision once you start your business operations. Every decision comes with consequences. So, it is essential to think about all the steps and requirements before you file the official documents.
Here are seven things that you should consider before forming an LLC:
1. Make sure you understand what an LLC is.
First, you should know that an LLC is a hybrid structure. It combines the advantages of corporations and partnerships. LLCs have two key features – limited liability and pass-through taxation.
So, what does this mean?
It means that an LLC protects the assets of the owners. It also allows them to choose to report the income from their business operations on their personal income tax returns. Owners can also choose to apply for taxation at the corporate level if they want to.
2. Decide where to conduct your operations.
There are many factors that you should consider when thinking of where to register your business. Most owners decide based on their place of residence. States have different laws when it comes to LLCs. Research these regulations before making your decision. Choose the one that best serves your interest.
If you want to conduct business outside of the state where you are forming an LLC, you should file authorizations to transact business, referred to as a ‘Foreign Qualification’. Doing this will help you be able to operate as a foreign LLC in the other states that you have chosen.
3. Choose your business name carefully when forming an LLC.
Make sure no other company is operating in your state under that name. States have naming guidelines that LLCs should follow. Find out the list of restricted words you cannot use for your company name because these may require the filing of additional paperwork. Do not forget that your company name should include LLC, L.L.C., or limited liability company.
If you are thinking of using variations or a different name when conducting business, you should file for a Doing Business As (DBA). This way, you will not have any issues operating under that other name. You should apply for a DBA after you file the LLC with the state. Remember, your LLC should be registered first.
4. Ask yourself if you need investors or not.
Just because others are doing it does not mean you should too. Sometimes, it is better to start your business using your money. Investors usually expect to have returns on investment, which may complicate things for you. You may still have investors if you want to. But, make sure you negotiate and clarify the terms. You can come up with an agreement indicating that your company will only return their money once you have sold or liquidated the LLC. This way, everyone will know what to expect from each other.
5. Decide on the management style you will implement.
LLCs can be made up of many owners, which are also known as members. So, the management of the business can be a crucial issue. Make sure you and the other owners agree on how to run the company. Management flexibility is one of the things people use to describe an LLC. Generally, the management styles that LLCs use are either member-managed or manager-managed.
6. Consider hiring the services of an accountant or a tax lawyer.
The pass-through tax treatment is one of the advantages of LLCs. However, there are also other taxes that you should file depending on the state where you are conducting business. An accountant or a tax lawyer can help you ensure that you are filing the right taxes on time. A knowledgeable professional will be helpful, especially to those who find the taxation process too technical.7. Find a professional who can help with the process. Forming an LLC does not have to be a complicated process. You can rely on the expertise of someone who has the proper knowledge and experience if you find the process overwhelming. They can even take care of the paperwork for you. They will help reduce stress and give you peace of mind. Having proper support can help you form an LLC without facing unwanted challenges.