3 Reasons You Need To Form An LLC
If you are one of these things; freelancer, part-time consultant, desire to be a consultant, have a specific skill set that many companies would make use of, forming an LLC could be an attractive option for you. They are pretty flexible entities and you can use them for any purpose. They offer a lot of great benefits, and they’re relatively pain-free to set up! Out of all of the entity types, an LLC would most likely offer the most protection and benefits. Before you even begin the process, make sure that you have all the necessary documents of identification that you need.
Requirements differ by state, but you’ll need various documentation to set up your new LLC. So if you’re even uncertain about your birth certificate, figure out how to get a certified copy of the birth certificate ASAP because you want to make sure that you have all your ducks lined up! It’s not too challenging of a process, but it can feel like a lengthy one. You’ll need to find your name, file articles of organization, then around 5-6 more steps after that to make sure that you’ve got your bases covered if you want to do business out-of-state. If you’re still on the fence about it, here’s a few reasons why forming an LLC could be a great business decision for you as entrepreneur:
You have control
LLC’s offer a great deal of flexibility. You write the operating agreement, no one else. It doesn’t matter if you have a 5 million dollars in angel investment, or if you’re a lone operator, you make the rules, and you can write them to suit your needs and interests. LLC’s are also very popular amongst small business investors, seed investors and angel investors in small amounts of 500k and under. Membership in an LLC could mean individuals, corporations, or trusts, and you can have unlimited members, and there’s little restriction with who can be a shareholder. As a member, you can own your LLC, OR you can elect an outside entity to manage it, this is not allowed in a corporation. Generally, there’s also less compliance-requirements imposed by the state you live in, and you gain more credibility as a business with an LLC as opposed to a sole proprietorship.
You get protection
If you have real estate, an LLC is a great way to protect your investments from random lawsuits that could potentially be filed against you by random people. For example, if you get into a small fender bender and the other person decides to sue you, they cannot liquidate your assets like property if they are held within an LLC. An LLC can also protect your intellectual property if you lease whatever trademarks or copyrights you own to be used. You’ll need to sign some paperwork and transfer money in order to make the arrangement official! You can isolate your personal assets across LLCs to ensure that it’s protected by any lawsuits and debt.
If you’re running your own freelance business and a small startup–you’re probably going to have a lot of upfront costs and not be profitable for a while. A good way to save money during tax season is to form an LLC. You claim many expenses, such as coffee or the drive to see a client, as a business expense. As a business, you don’t pay taxes. Any income the business makes is “passed-through” to its members, who incur its gains and losses, and they report it on their personal taxes. As a member you can claim many of these as business expenses for work, get tax deductions once tax season rolls by!
Potential downsides of an LLC:
Cost – it can cost a lot to form an LLC, more so than a sole proprietorship. You’ll want to check with your secretary of state’s office to get an idea of all the possible state-imposed fees you might have to deal with. There is an initial formation and there may be other extra requirements like an annual report, or other tax fees that are imposed on you.
Ownership transfer – It’s harder to transfer ownership of an LLC, than with a corporation, for example. You can’t sell shares of an LLC to increase the ownership of another entity within your holding company. Members cannot sell their share of the company. In order to transfer ownership of your LLC to someone else, or increase ownership among others, you and all members must approve the addition and alteration of ownership percentages among all members.
Ultimately, you have to look at whether the positives outweigh the potential costs depending on your expenditure, potential profit, and number of members in your holding. An LLC is still a wonderful option for starting your small business and protecting your assets–so definitely worth considering!