Launching a new business can provide you with an enormous sense of pride and ownership. After all, when stewarded wisely, your business can become a lasting part of your life and legacy. As such, you’ll naturally want to do anything you can to keep your business safe from potential threats.
And those threats can be many. In an increasingly litigious environment, the risk of a catastrophic lawsuit is always looming, no matter your industry. And that’s to say nothing of creditors and general financial uncertainty.
Thankfully, there are some strategies that any business owner can take to keep their business safe. And one of the most important strategies of all is to select the right legal structure for your company.
There’s no cookie-cutter answer here, as all businesses are different, but generally speaking, the most advantageous option is probably going to be registering your business as a Limited Liability Company, or LLC. The LLC structure provides some critical safeguards to keep your business legacy safe and sound.
LLCs and the Importance of Legal Structure
But what is an LLC, exactly, and what makes it so advantageous for small business owners?
To understand what makes the LLC so beneficial, it’s first important to consider some of the alternatives. For example, when you first start generating income on the basis of self-employment, your business is automatically classified as a Sole Proprietorship. In this formation, there is no legal distinction between you and your business; in other words, the business is not its own, self-contained legal entity.
Running a Sole Proprietorship can be easy, administratively speaking, and comes with little regulatory oversight. But when it comes to legal protections and other important safeguards, the Sole Proprietorship has little to recommend it. Because there is no distinction between business and owner, any lawsuit you’re hit with is really directed at you personally.
The same is true of Partnerships, which operate much like Sole Proprietorships, but with one key difference: You can invite business associates to share in business duties and revenues.
And then there’s the LLC. When you register your business as an LLC, you actually do establish it as an entity all its own. What this means is that you can keep your personal assets and liabilities separate and distinct from any business assets and liabilities.
This creates a lot of important advantages, and provides you with the legal tools you need to safeguard your business from a range of potential threats.
The Benefits of Registering an LLC
There are several specific benefits that business owners can anticipate when they register as an LLC.
First and foremost is legal liability. When someone brings a lawsuit against your business, the LLC allows you to keep personal assets out of it. In other words, you don’t have to worry about a business lawsuit targeting your retirement savings or your family’s nest egg. This, in turn, allows you to invest more confidently in your business startup.
LLCs also offer the benefit of pass-through taxation. You simply claim profits and losses on your personal tax return, then pay at your normal rate. This allows you to avoid “double taxation,” a major concern for Corporations.
In addition, registering your business as an LLC confers professional credibility. Simply put, taking this step shows that you are serious about your business, which can help you earn the trust of potential partners, even investors. It also opens more opportunities for business loans and lines of credit.
These are just a few of the reasons why it can make good strategic sense to register your startup as an LLC. The question is, how do you do so?
How to Register an LLC
The specific steps for registering your business as an LLC may look a little different depending on which state you’re in. So, if you’re registering in the Lone Star State, it might make sense to look up a detailed guide for Texas LLC formation.
Generally speaking, however, the process of forming an LLC follows this basic trajectory.
Choose a Name for Your LLC
What’s in a name? For LLCs, quite a bit. Legally speaking, you must have a name that is not already in use by another LLC in the same state.
Select a Registered Agent
LLCs are also legally required to have a Registered Agent. Your Agent’s job is to receive legal and tax documents on your business’ behalf. Your Agent can be either an individual or an organization, but must have a physical mailing address within the state where you register.
File Documents with Your State
Most states will require you to file a document known as the Articles of Organization. This document covers things like the name of your business, the contact information for your Registered Agent, details about any LLC members, etc.
Pay the Nominal Filing Fee
When you file your Articles of Organization, you will also need to pay your state’s specific filing fee. This amount can be anywhere from $15 to $300, simply depending on the state you’re in.
Create an Operating Agreement
Another document you’ll need is the Operating Agreement, which outlines how you’ll allocate profits as well as duties between LLC members. This document is not legally mandatory, but it can certainly be helpful as you seek to avoid long-term legal issues.
Get Your Finances in Order
To take advantage of your core LLC protections, ensure that you have a business bank account, distinct from whatever personal checking or savings accounts you might have. Relatedly, claim an Employer Identification Number (EIN) from the IRS.
Take a Strategic Step Toward LLC Formation
As you consider taking strategic initiatives to keep your business safe and secure, think seriously about the benefits of LLC formation. With questions, speak with a business coach or attorney in your area.
