Limited Liability Company – The Basics of Creating Your Business
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Whether you’re planning your business to service a very select clientele or you’re going to open your doors to the public and take on all comers, you’re going to need to create the business as a separate legal entity so that you can’t be held personally responsible for the business’ debts and other liabilities. This can be done in a variety of ways, but one of the more popular of these is through the creation of a limited liability company. A limited liability company, or LLC, is a corporate entity that combines many of the best features of legal partnerships with the stability and separation afforded by corporations.
One of the main advantages to a limited liability company is that it’s one of the more flexible business entities that you can create… the company can be run in a manner similar to a partnership, yet has many of the same protections for its members as a corporation would have. The LLC has become increasingly popular in recent years, to the point that many major companies that you deal with on a regular basis may be limited liability companies. Is it in your business’ best interest to be incorporated as an LLC? Here’s some information for you to consider so as to help you decide.
Partnership-Like Features
Much like a standard partnership, money that is made through a limited liability company can be channeled directly to its members (with “members” being the legal term for an LLC’s owners.) This is important, because it deals with a major drawback of incorporation… something that is known as “double taxation.” With a standard corporation, any money that the corporation makes is taxed at a special corporate rate. When the owner of a corporation wants to be paid, they have to take their income as a dividend of the money that the corporation has made… and then they have to pay standard income taxes on that money. This means that taxes have been taken out of their income twice by the time that they receive it; this is why it’s advantageous to have profits flow through directly to members. Income tax still has to be paid on money that is earned through an LLC, but the separate corporate tax rate doesn’t apply to any money that you’ve made (as it isn’t held by the company itself.)
Corporation-Like Features
The great thing about limited liability companies is that they feature some of the better aspects of corporations in addition to those of partnerships. One of the big features that they share in common with corporations is that they are able to assume liability for their own debts… meaning that if the company goes bankrupt or gets sued, then you aren’t going to have to worry about the judgment affecting your personal finances. The company will absorb the debt, and while it may have to be liquidated in order to satisfy what is owed none of that debt will carry over to you provided that the corporate veil is still intact.
If you aren’t sure what that last piece about the “corporate veil” means, it’s simply a way of saying that your finances are safe so long as the court doesn’t order that you’re personally liable because there wasn’t a distinct line between your personal finances and the company’s finances. So long as you run your business properly like a business should be run (meaning that you pay yourself with the payroll instead of taking money directly from the business, don’t use the business to cover personal expenses, and essentially don’t treat the business’ books like they were your own private credit account), then the chances of the corporate veil being pierced are exceptionally slim.
Popularity of LLC’s
Even though many people think of limited liability companies as simply being restricted to small business owners, there are actually a number of very popular businesses which are actually LLC’s. These companies include booksellers, private lenders, and just about any other business type that you can think of… all taking advantage of the unique features offered by limited liability companies in order to operate their business the way that they want to without having to run it as a full corporation.
Another place where LLC’s are quickly becoming popular is the internet… a number of major websites have a limited liability company behind them, which is used to shield the company’s members from any financial liabilities which could result if their website should happen to fail. As more and more web designers are learning about the advantages of using LLC’s to protect their personal assets and to organize their business interests, the number of limited liability companies which are operating on the internet continues to increase.
Creating a Limited Liability Company
If you want to create a limited liability company as your business, then the process is actually quite simple. While there are a number of companies out there who will process all of your paperwork and organize your company for a fee, the basic steps required to create your own LLC can be done from the comfort of your own home and all that you’ll have to pay are the filing fees in order to get the appropriate paperwork filed with the state that you live in. In some states, you’re even able to file your LLC paperwork online in order to speed the process up even more.
The first thing that you’ll need to do is to find out what the specific rules are in your state for creating a limited liability company. Many aspects of LLC’s are standardized nationwide due to the fact that they are treated as a business entity by the IRS and other federal agencies; different states may have specific requirements regarding business licenses and residency. In most if not all states, the name of the business will be required to contain the letters LLC or the words “limited liability company” at the end in order to signify that the business is, in fact, and LLC.
Once you’ve learned any and all requirements for creating an LLC in your state, then you’ll have to file the appropriate paperwork with the Secretary of State (or the state agency specified in your state’s rules for creating a limited liability company.) This generally involves filling out a form and mailing it in along with a registration fee. After the paperwork has been filed by the Secretary of State (or the state agency), then your business will legally be viewed by the state as a separate entity.
All that remains from that point is to contact the IRS and file for an Employer Identification Number, or EIN. This works much like a Social Security number for businesses, and is used by the IRS to track your company’s income for tax purposes. In order to get an EIN, contact the IRS or visit their website to learn the process of applying for one and then submit the necessary paperwork.
Julie-Ann Amos is a professional writer and business consultant. She has over 14 books published in many countries. She runs Exquisite Writing, a large freelance writing agency that produces a wide variety of business writing, articles, web pages, website contents, books and ebooks for an international client base. Topic experts available for a wide range of subject areas.
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