If you are starting out a new business in the US then there are many choices available for selecting your business structure. For Ex. Corporation, LLC, Partnership, Sole Proprietorship, Co-operative, and many more. Most of the start-ups in the US are confused about whether they should form a corporation or LLC. There are multiple advantages of forming an LLC in the US. But first, let us give us a brief knowledge about what an LLC business structure is.
What is an LLC Business Structure?
The full form for LLC is Limited Liability Company. Any business formed under LLC protects the business owners from the personal responsibility of the company debts. It creates a separation between the owner’s personal assets and business assets. This means that the owner(s) personal assets will be safe if the company fails due to debts or lawsuits. If you are willing to form Delaware LLC, then a Delaware entity search is the first and the most important step you have to go through.
How Does LLC Differ From Corporation?
LLC differs from a corporation in a way that the owners of LLC businesses have equal ownership/right over the assets of the business due to their investment while forming an LLC. While cooperative businesses have shareholders who have a little or more contribution to the business depending on the number of shares they own. Now that you know about corporation and LLC business structures, let’s talk about the reasons for which LLC makes sense for start-ups.
Why is an LLC Good For Start-ups?
There are several benefits of choosing an LLC business formation for your start-up business. We will talk about some of the major benefits in this section.
1. You can Avoid Double Taxation
Double taxation simply means that the owner and company will be taxed differently. This usually occurs when an entrepreneur decides to form a business under C-Corp. This is not the case with LLC. Creating a Limited Liability Company can help you avoid double taxation. As we mentioned, LLCs can have multiple owners and it is taxed as a partnership. If the owner is willing to treat the LLC as a corporation for the purpose of federal income tax then you have to pay separate tax.
2. Freedom of Choosing Location
The cost of setting up an LLC differs from state to state. For example, setting up an LLC in Ohio is cheaper than in New York and Similarly, setting up an LLC in Oklahoma is cheaper than in Ohio. Usually, it is obvious that LLC should be formed in the state where you work. But in case an entrepreneur wants to set his/her LLC in a different state where it costs less, then he/she can do that also. One thing to know is that you cannot set up an Ohio LLC in New York just because Ohio LLC is cheaper. If your business operates in New York then you will be subject to New York tax filing requirements regardless of where your LLC was formed.
3. You Can Protect Your Personal Assets
A sole proprietorship or partnership company is not safe for small businesses that are just starting out. Especially not at all when the company goes into debt or faces lawsuits as your personal assets will also be at risk. That’s why forming an LLC business structure for start-up businesses gives a sense of security to the owners that their personal assets are always safe.
4. You Can Register Easily
Starting an LLC for startup businesses is very simple and fast compared to other business structures. Filing an LLC in some of the states like New Mexico, Arizona, and Colorado costs only about $50. After you have registered your LLC, the next simple step is to get your Employer ID Number from the IRS and separate your bank accounts by getting a business bank account. And your LLC will be formed after these simple steps. The only step that might make the LLC formation hard is finding a name for your LLC. Some advice from our side would be to pick a name that is short and simple. Make sure that your name stands out and any identical or even similar name is not used by any other company before because it will be difficult to change the name once the LLC is formed.
5. LLCs Offer Equity-Based Compensation
Any start-up business offers its investors equal rights to the business in the form of shares or stocks. That’s why investors are typically the founders’ backbone. Do you know what happens in the case of LLC? Well, It is surprising to know that LLCs can also issue stocks. It is true that LLC doesn’t have shares to offer but it can still offer equity-based compensation to its investors. Of Course, having proper equity agreements is difficult in the case of LLCs compared to C-corp businesses. Hence, you must remember the tax benefits that can come with a Limited Liability Company.
An entrepreneur can never go wrong if he/she decides to form an LLC for their start-up business. In the early stages of business, It gives assurance that your personal assets are safe when they are making bold decisions for their start-ups. On top of that, It is fairly easy and simple to convert your LLC business into C-corp in the near future. On top of that, we also covered some advantages of choosing an LLC business structure over a corporation or other business structures.