Common Misconceptions When Forming an LLC
Since its inception, the limited liability company (LLC) has become a popular choice for many emerging entrepreneurs. Among the major reasons are the asset protection and flexibility in taxation that it offers. To put it simply, it combines the advantage of a corporation and the features of a partnership/sole proprietorship. However, along with its popularity comes various myths. These misconceptions can prevent some companies from choosing the LLC structure. In some cases, these may also lead to legal problems. Here are some common misconceptions when forming an LLC:
A Complicated Process
One of the most widespread myths that a lot of people believe is that the process of forming an LLC is difficult. The truth is that it can be an easy route to take.
While there may be multiple steps and requirements involved, having a clear understanding of each task can help a company accomplish everything without hassle. Generally, it involves the payment of fees and filing of formal paperwork, which is usually known as the Articles of Organization or Certificate of Formation.
The necessary information in filling out the form depends on the state. But it often includes the LLC Name, principal office address, and the name and address of the registered agent. For a more detailed explanation of the process, check out our state-specific articles.
Additionally, companies may have an easier experience by leaving the whole ordeal to a seasoned third-party organization like DoMyLLC. Not only will this expedite the process, but it will also ensure compliance with all state requirements.
Exclusive to Small Businesses
A lot of people believe that the LLC structure is only for small businesses. While many small companies and startups choose to be LLCs, there are big companies that opt for this structure as well. A good example is Amazon.com, LLC, which is a subsidiary of Amazon.com, Inc. in charge of the retail sales.
The business entity structure does not necessarily depend on the size of the company. It all has to do with the needs and activities of the business.
Tax Avoidance
LLCs can choose where to organize their business. It does not have to be the owner’s place of residency. However, one common misconception is that opting for a different state will help in avoiding taxes.
Forming a business in any state comes with responsibilities. Additionally, operating in a state outside of the one where the LLC is formed still requires the payment and reporting of taxes to that state. For example, a company organized in Wyoming will have to pay taxes in New York if it decides to conduct business there.
Companies should also understand that doing business in any state requires registration. That means an LLC will have to register as a foreign LLC in all outside states where it transacts. Read our article 6 Good Reasons To Register For Foreign LLC to find out if it is necessary for your company.
American Citizenship
Many people wonder if American citizenship is necessary to own an LLC. The simple answer is no. Most, if not all, states allow non-residents to be LLC owners. That means even non-Americans can become members of LLCs.
The distinction in LLC ownership when it comes to citizenship falls in taxation. U.S. residents have Social Security numbers that they use for tax reporting and payment purposes. On the other hand, non-citizens will have to acquire a tax identification number (TIN) from the Internal Revenue Service (IRS) and pay taxes on the income that they get from the LLC.
Unlimited Asset Protection
This misconception can be dangerous to companies and their owners. One of the main features of an LLC is the so-called corporate veil. It is the limited liability protection for the LLC owners. Contrary to what some may think, it is not impenetrable.
Here are some situations that could pierce this corporate veil and remove an LLC’s asset protection feature:
- A court proves that the company operates as an extension of the owner and is not a separate entity.
- The LLC participated in fraudulent activities.
- The LLC has unjustly damaged its creditors.
Those are only some of the common misconceptions when forming an LLC. Companies should be more careful about what to believe. To prevent any issues, a good option is to hire a reliable third-party organization like DoMyLLC.
With a team of experts handling the business formation, a company owner can be sure that their business remains compliant with all state obligations. Additionally, they will prevent themselves from falling prey to myths that could hurt their entire company.