There’s an intrinsic connection between the entrepreneur and his or her business. Most run their enterprise as a sole proprietorship; they are in essence one entity. Not many small-business owners think twice about the nature of their business and its relationship to ownership.
But there’s the rub, Income.com thinks not enough entrepreneurs are putting solid thought into other avenues of business structure and could use some small-business tips for success.
Not pushing the boundaries of small-business doesn’t jibe with the entrepreneurial spirit, and that notion extends to every function of small-business: Entrepreneurs need to investigate other business structures that could benefit them and their company.
For instance, changing your format from sole proprietorship to a Limited Liability Company (LLC) offers a whole new range of advantages for entrepreneurs who make the switch. Primarily, it provides protection of personal assets that sole proprietorship does not carry.
There are many other benefits, but first, you’ll need to understand how business structures differ, what an LLC title entails and how you go about pursuing it.
What is an LLC?
An LLC is one of the four most commonly recognized business structures; the others being sole proprietorship, S-corporation and C-corporation. As defined by the U.S. Small Business Administration (SBA), an LLC is a hybrid business structure in which owners are called members. It combines the liability features of a corporation and the tax efficiencies of a partnership. LLCs are not treated as a separate business entity for tax purposes, but rather, profits and losses are “passed through” the business to members of the LLC, who then report profits and losses on personal tax returns.
State laws vary regarding LLCs, but most states allow for LLCs to have only one member, thus preserving the single-entrepreneurial feel to a startup in case an owner does not want to share duties and responsibilities with other members.
What advantages does an LLC offer?
The overarching attraction of LLCs is the flexibility in taxes the business structure affords its members. It also has many other advantages that draw entrepreneurs:
• As corporations can do, LLCs enable members to separate and protect personal assets. The limited liability capabilities extended to owners gives them some some room for maneuvering when dealing with obligations. If an LLC accrues debt or is sued, the personal assets of members are usually exempt from such proceedings.
• While an LLC is different from a sole proprietorship, it is taxed in the same way. Passing profits and losses through the LLC to a member is a common strategy. However, owners can also choose to be taxed as a corporation, which can help entrepreneurs avoid double taxation relating to profits and dividends.
• It may be a less concrete benefit of opting to incorporate, but becoming an LLC can help owners leverage credibility with consumers. Adding “LLC” or “Inc.” to the end of a business name definitely has a positive impact on impressionable consumers.
• While a sole proprietorship cannot deduct expenses like healthcare, entertainment and travel, LLCs and corporations can. Before owners receive their income from the business, LLCs are allowed to deduct normal business expenses, including salaries.
• Say an entrepreneur has a not-so-good credit history. Under a sole proprietorship, you and your businesses are one and the same – and that notion extends to your credit history. But corporations and LLCs can establish a separate credit profile for the express purpose of building a new line of credit for your business to utilize.
How do you become an LLC?
So, you’ve decided to investigate restructuring your business to become an LLC. Now, what would the first step be?
You’ve got to start out where every other business starts: choosing a name. The name cannot be the same as any other existing LLC in your state, must indicate it is an LLC and cannot include words restricted by your state. Some types of businesses are not allowed to be LLCs and thus cannot have keywords like “bank” or “insurance” in their name.
The next step is to file the “articles of organization” with your secretary of state’s office. The articles of organization is a simple document and requires basic information like names and addresses of members. Filing fees can start at $30 and some states may have different registration requirements. As noted by The Wall Street Journal, you can find fee and registration information by using FindLaw’s online guide.
An important step, though not required by law, is developing an operating agreement. Such an agreement lays out the arrangement of the business deal, percentages of ownership if you have more than one member, duties, responsibilities and finances. It’s basically a glorified business plan, but it is no less important than any other step if you want to run a successful enterprise.
Income.com advises entrepreneurs to open their mind to different business structures that may facilitate better growth for their startup. As evidenced, LLCs provide a range of benefits from tax flexibility to an enhanced reputation – but many small-business owners remain in the dark on such opportunities. Get acquainted with what an LLC is, dig through its applicable benefits to your business and make sure you correctly file everything you need to change your business structure.