How to Start an LLC: A Primer for Entrepreneurs

If you’re launching a new business venture, you might wonder if it’s best to incorporate your company or create an LLC.

Both types of business structures have unique benefits, and the decision between them may not be clear cut for everyone. For example, in some situations corporations must meet certain legal obligations, like having a certain number of shareholders or meeting certain capital requirements. In other scenarios, an LLC may make more sense as a company structure. The following is a guide to help you understand the benefits and drawbacks of these two business entities so that you can choose the one that’s right for you and your new venture. If you are reading this article as an aspiring entrepreneur and are exploring ways to start your own business venture, read on to know more about how to start an LLC as well as why should consider setting up an LLC instead of corporation when starting a new business venture.

LLC Basics

First, let’s review what an LLC is and what it does. LLC stands for limited liability company, and it’s a type of business that provides its owners with asset protection. Because of this feature, LLCs are very popular for start-up ventures and small businesses.

In order to become an LLC, you’ll need to file what’s called a “certificate of formation,” a legal document that establishes the company. There are a few other items you’ll need to take care of, and the exact process may vary a bit depending on your state’s regulations.

Corporation Basics

Corporations are entities that are separate from their owners, which means that they shield owners from certain types of liability. This feature makes corporations a popular choice of business structure for larger ventures.

The path to becoming a corporation can vary a bit depending on your state’s regulations. You’ll need to file what’s called a “articles of incorporation,” which is the official document that establishes the company. There may be a couple other items that you’ll also need to take care of, and the exact process may vary a bit depending on your state’s regulations.

Which is better: LLC or Corporation?

When you’re deciding between an LLC and a corporation, the most important consideration is what type of liability protection you need. The way each business structure protects its owners from liability is different.

Corporations provide their owners with what’s called “corporate veil” protection. This means that if a corporation incurs debt, gets sued, or has other legal issues, the owners are not held personally liable. However, this protection comes with some limitations. If a corporation encounters an issue that is serious enough to warrant a lawsuit, its owners may be held personally liable if they have acted negligently. For example, if a corporation has major financial issues, its owners may be held personally responsible for covering the debts unless they can demonstrate that they are not at fault for the problems. It’s worth noting that small businesses with up to five shareholders do not have the same level of protection as corporations with larger numbers of shareholders.

LLCs offer their owners asset protection, which means that creditors can’t come after the owners’ personal property if there is a debt or other legal issue with the company. In order to receive this level of protection, however, LLCs must meet a few requirements. LLCs need to have at least two owners, and those owners must be named in the company’s legal documentation. In addition, LLCs must have a written operating agreement that outlines the owners’ rights and responsibilities.

Benefits of an LLC

When you are considering the benefits of an LLC, you first need to remember that an LLC provides asset protection for its owners. Whether or not that’s worth the extra effort and cost of setting up an LLC will depend on your specific situation.

Some other benefits of LLCs include:

Tax advantages: LLCs have the option of being taxed like a corporation or being taxed like a sole proprietorship. This can affect how much you pay in taxes and what type of business deductions you can claim.

Easy transferability: One of the big benefits of an LLC is that it’s easy to transfer ownership to new people if one owner decides to sell their stake or another owner decides to join the company.

Easier fund-raising: If you plan to seek outside investors or want to apply for certain types of business grants, you may need to prove that your company has a certain level of professionalism. A corporation, as a more established type of business, is often seen as a more reliable investment.

Disadvantages of an LLC

There are some disadvantages to starting an LLC, and you should be aware of them before deciding to go that route.

Legal and administrative costs: While corporations also incur some setup costs, LLCs require more work. You need to name the owners, create an operating agreement, and file paperwork. All of these steps can be time-consuming and costly.

Taxes: While taxes are a disadvantage for both business structures, an LLC may be taxed as an S Corporation. This can make filing taxes more complicated.

Benefits of a Corporation

Since the corporation offers the most protection from liability, the primary benefits are financial.

Tax advantages: Because corporations are separate entities, their owners can take advantage of a few different tax advantages that might not be available with an LLC. For example, corporate owners can deduct any reasonable expenses that are related to their business.

Easier fund-raising: If you plan to seek outside investors or want to apply for certain types of business grants, a corporation may be the better choice. Corporations are seen as more professional and reliable investments.

Professionalism: Corporations are seen as more established business entities, so they may be able to get better terms when purchasing equipment or supplies.

Disadvantages of a Corporation

Like all types of businesses, corporations have their disadvantages. Some of the potential drawbacks to starting a corporation include:

Complexity: The legal structure of a corporation adds layers of complexity to your business operations. It might be harder to make quick decisions as a result, and you may have to spend more time reviewing contracts before signing them.

Taxes: Corporations are required to pay taxes on their earnings. This means that the owners will have to pay taxes on the money they receive, even if they reinvest that money back into the company.

Financing: Corporations have to follow more strict rules when it comes to financing, which can make it harder to get the money you need for equipment or other business purchases.

Final Words: To Corp or LLC?

As you can see, both types of businesses have their advantages and disadvantages. If you’re still trying to decide which one is right for you, you may want to think about your long-term plans for the company. If you see yourself growing your business over time, you may want to go with a corporation.

If you’re just starting out, you may want to consider an LLC. It’s a simpler structure that’s less expensive to set up. You may also want to consider how the type of business structure you choose might affect your ability to get financing.

As you can see, both corporations and LLCs are popular business types. They each have their own set of benefits and drawbacks, so the decision between them may come down to your specific situation.