In the early days of a startup, it’s normal to feel a sense of optimism. The future is unwritten, and the sky’s the limit for what your business can achieve.
While such optimism is certainly appropriate, it’s important to balance it with some realism. Yes, good things await your fledgling business, but so too does hardship. It’s important to prepare your business for all contingencies.
One of the best ways to future-proof your startup, ensuring it’s ready for any and all possibilities, is to register it as an LLC. LLCs provide entrepreneurs with a number of important resources, making it much more likely that they will withstand shifting or unfavorable conditions.
What is an LLC?
LLC stands for Limited Liability Company, and it’s one of the most popular small business designations in the United States.
To understand what makes the LLC so advantageous, it’s important to consider some of the alternatives. When you launch any new business venture, your default status is Sole Proprietorship. In this designation, your business does not count as its own distinct legal entity. In other words, you cannot separate business finances and liabilities from personal ones. They all go into the same big bucket.
Registering your startup as an LLC actually does establish a unique legal entity, allowing you to maintain separate categories for business assets/liabilities and personal assets/liabilities. This isn’t just some weird bookkeeping quick, but a considerable strength for entrepreneurs looking to prepare for an uncertain future.
Understanding LLC Protections
Part of what makes the LLC such a strong bulwark is that it provides a high level of personal liability protection.
Think about it this way. If you’re running a Sole Proprietorship and someone brings a lawsuit against you, there’s no way to extricate your personal interests from your business affairs. In other words, it’s not a lawsuit against your company, but about you.
Not so with an LLC. LLCs provide built-in protections against litigation as well as creditors, meaning your personal assets are off the table. This is critical for thinking about the uncertainties of the future, allowing you an option to invest in your business while managing your personal level of risk.
Other LLC Advantages
There are other reasons to consider the LLC for your startup, too.
- Pass-through taxation. LLCs are automatically taxed on a pass-through basis, which means you declare profits and losses on a personal tax return, and then pay at your normal rate. Your business can avoid the “double taxation” that most Corporations face.
- Enhanced credibility. Registering your startup as an LLC is also a good way to confer professional credibility. Simply put, LLC formation proves that you take your business seriously, which can help foster relationships with potential partners, investors, and vendors.
- Financing options. It’s also worth noting that the credibility of the LLC makes it possible to secure business loans and lines of credit, typically at rates far more advantageous than those that Sole Proprietors would receive.
- Flexibility. Finally, LLCs are famously flexible and can be managed in a number of different ways. For example, you can bring in partners, outsource to a third-party management team, or just do everything yourself. This flexibility is essential for startups looking to remain resilient and adaptable in the long term.
The Process for LLC Formation
When it comes to actually creating an LLC, there are a number of steps in the process. These steps can vary from state to state, but in most instances they will follow this same basic trajectory.
Choose a State for Registry
Usually, you’ll just want to choose the state where you are headquartered. The only real exception is if you’re starting a real estate business, in which case you’ll want to register in whichever state or states you’re buying property.
Select a Name
It’s important to have a name that is not already in use by another LLC in the same state. You should be able to find a searchable online directory for your state, making it easy to determine if the LLC name you prefer is still available.
Appoint a Registered Agent
All LLCs are legally required to have a Registered Agent, either an individual or an organization who receives legal correspondence on the company’s behalf. When it comes to selecting a registered agent for your company, you can pick anyone with a local mailing address in the state of your registry.
File Articles of Organization
This is the name for the legal document you must file to formally register your business as an LLC. You will file with your Secretary of State, and as you do so you’ll need to pay the registration fee. Depending on your state, this could be anywhere from $15 to $300.
Make an Operating Agreement
This document isn’t legally mandatory, but it is advisable. Basically, it outlines how you and your partner's share responsibilities and allocate profits. This document can help you avoid legal tension down the road.
Claim an EIN from the IRS
Your Employer Identification Number can be obtained from the IRS. You won’t necessarily need it right away, but it will be necessary before you can file taxes or administer your first payroll.
Set Up Bank Accounts
It’s advisable for startup LLCs to have bank accounts that are for business purposes only, not connected in any way with personal savings or checking accounts.
Prepare for the Future. An LLC Can Help.
Every business owner must be mindful of the future, even in its uncertainty. One of the best ways to be prepared for anything is to register your business as an LLC. This can help you pivot as your industry changes, protect yourself from potential assets, and enjoy the flexibility you need for success.
Author Bio
Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about content and social media marketing, as well as subjects related to small business ownership.