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Choosing the Right Business Entity - LLC

Updated: Apr 12, 2022

In this blog, we discuss the following:

Choosing a business structure is similar in the sense that it reminds us of choosing which university to attend as we were preparing to leave the last year of high school. You either know which university to attend, you’re unsure where to start, or considering a few options based on your needs and wants.

Choosing where to start your next new journey is the same as finding the right business structure, as it is one of the first steps to starting a business. It can sound daunting but, it doesn’t have to be a tough decision once you understand the differences and what you’re looking for. Luckily, unlike universities, there are just a few to pick from. There are four main business entity choices: sole proprietorship, partnership, limited liability company (LLC), and corporation. In this blog series, we go over the advantages and disadvantages of each, starting off with a limited liability company.

Advantages of Limited Liability Company

  • An LLC is a US business structure that combines the limited liability protection of a corporation with the simplicity and pass-through taxation of a sole proprietorship.

  • Owners who want to limit their personal liability and potentially pay a lower tax rate than they would with a corporation.

  • An LLC does not require as much annual paperwork or have as many formalities as corporations.

  • Investors often require a business structure offering them limited liability prior to investing.

Disadvantages of a Limited Liability Company

  • Big investors typically prefer to invest in corporations over LLCs.

  • While LLCs are relatively inexpensive to form and maintain compared to a corporation, they are generally more expensive than informal business structures like sole proprietorships that don’t need to register.

  • Transferring ownership may be more difficult since LLCs don’t have shares of stock.

How to Form an LLC?

Another plus to considering a partnership is that there are very minimum legal procedures required. Although most states differ and vary, here are the general steps to forming an LLC:

  1. Choose a business name

  2. Appoint a Registered Agent - some states require this so the agent can receive important state correspondence and legal notices in person

  3. File Certificate of Formation - once the paperwork is approved, the fees are collected, you are officially the owner of a limited liability company

  4. Create an Operating Agreement - this may be one of the most important documents for the LLC as it established the rules for operating your company and gives further legitimacy

  5. File for an employer identification number (EIN)

  6. Follow Publication Requirements - once your LLC is registered and approved by the state, you’ll need to meet the state’s requirements by advertising its formation

For most small businesses, every penny counts. So, depending on who you go talk to, the recommendations can vary. A tax consultant might advise you based on your tax situation. A bookkeeper will have a different viewpoint for ease of data entry. Talk to a lawyer and you’ll get suggestions from the asset and liability protection side of things. You can talk to a financing expert and they can give you the best opportunities for obtaining credit and capital. Talk to investors and they’ll have a specific type of entity they will only invest in. A branding expert can give the best entity just based on the image and marketability of your company. No two businesses are the same. So make sure to talk to a professional to make the best decision for you and your business. Determine if an LLC is right for you. You can contact us today for a consultation.

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