Many entrepreneurs who want to start a business want a sole proprietorship or partnership.
There are advantages to running a business as a sole proprietor or with a partner.
Why a New Business Should Register as an LLC
Some of these include, not having to do much paperwork or pay expensive fees. Aside from that, most entrepreneurs either want to work by themselves or just with a few people so that they won’t lose control of their operations.
However, before you start a business you should take a long hard look at what kind of corporate structure you want. We suggest that you register your business as a limited liability company (LLC) for several good reasons.
Here are some of our reasons why you should consider registering a startup as an LLC.
The owner’s liability is limited
This legal protection (most commonly referred to as a corporate veil) is the power of the limited liability part of the LLC. If the business faces problems and lawsuits, an LLC will protect the assets of the owner from any liability. This is a highly cost-effective way to protect yourself and your new venture.
This means that any debts owed by the business are limited to the assets of the business, and not the assets of the owner. In simple words, the home, bank account, and other assets of the owner are protected.
This is the main reason why an LLC is better than a sole proprietorship for a business startup or a side hustle. The LLC is a different entity from its owners.
However, owners are not protected if they indulge in any illegal acts or for any acts of negligence.
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An LLC is easy to set up
The process to register an LLC is very simple. You can do it on your own. You need to complete the necessary paperwork and pay the filing fees to register.
Once you have registered, you can apply for an Employer Identification Number (EIN). Then you need to set up your business bank account and you are all set.
The LLC fees will vary from state to state, but they could be anywhere from $100 to $500. We suggest you set up your LLC in the state where you are operating.
Some people suggest registering your LLC in a state where the fees are low. But that is not a good option.
The most difficult part is selecting a name for your business. First, you have to select a unique name, one that is not already in use.
Second, once the name is registered, it is very difficult to change later on. So give this aspect very deep thought. We suggest you keep the business name abstract and short.
You avoid double taxation
An LLC is the best choice to avoid the double taxation that other corporations face. A business needs to pay government taxes.
The owners of other corporations, like C-Corporations, have to pay taxes once again on the income they get from the corporation. This is the double taxation trap.
On the other hand, an LLC does not pay taxes at the business level. All profits and losses are passed on to the owner/s who pay only personal taxes on profits or income from the LLC.
However, this is not as easy as it sounds. In other words, you need to work with a legal expert that can help you with the requisite paperwork. For example, if you are looking to register a company in Singapore, an LLC will have a different set of rules and regulations as opposed to setting up an LLC in Dubai. This is why you need experts to help you at every step of the way
LLCs have a more flexible structure
The LLC structure is easy to maintain. It is not difficult to add new partners or to sell an interest in the entity to someone.
LLCs have fewer restrictions than other corporations. C-Corporations, for example, may have to conduct shareholder meetings and have a board of directors.
But LLCs do not have such restrictions. The members may run the LLC or appoint someone else to do so.
LLCs can be
- Single Member LLCs—run by a single member or owner. Eg Professional LLC. Generally, it is preferred over professional corporations.
- Member Managed LLC—run by a group of members who all have the same share or duties and responsibilities of running the LLC.
- Manager Managed LLC—where managers run the LLC for the owner/s.
Also, when you first start up there are a lot of things you cannot foresee. Like who takes what responsibility, how to share the profits, what if a member wants to leave, and similar conflicts.
However, if you register as an LLC, you will need to set up an operating agreement that will help prevent future conflicts.
Besides this, it is not difficult to convert to a different corporation, like a C-corporation at a later stage.
Compared to a sole proprietorship, an LLC will have greater credibility. Banks and investors may be happier to invest in an LLC rather than a sole proprietorship or a partnership. This is because it makes your business entity more of a legal entity as it has to be registered with the state.
This is a big plus point you need to consider, especially for a startup. Like we said earlier, at a later stage, you can always change your entity to be a C-corporation.
There are many reasons why you would prefer running your business as the sole proprietor or a partnership. To start with this may be a good option. However, as you grow, it may be better to register as an LLC to avoid double taxation. LLCs are easy to form and maintain.
The main advantage of an LLC is that owner/s are protected from any personal liabilities other than negligence or illegal activities. They can also be converted to another form of a corporation at a later stage.
We suggest that new businesses initially start as LLCs.
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