Do I Need an LLC? How to Tell If It’s Right for Your Small Business

Bakery employees at counter

In 2021, there were over 413,000 business applications in the United States. Each of these businesses has its own characteristics and goals that make its needs different from the next.

One of the most common concerns among business owners is answering the question, “Do I need an LLC?” While forming an LLC is valuable for many small businesses, it’s not right for everyone. Let’s look at how to tell if an LLC could be right for your small business.

What Is an LLC?

An LLC is a limited liability company and is one of the most popular business structures in the United States. Since you need to file paperwork with your state to form an LLC, it is considered a formal business entity.

An LLC has a separate legal identity from its owner(s). This leads to several benefits, which will be discussed later.

As a small business, your LLC can have just one owner or many owners. They will be known as “members” in your formal documents.

LLCs are typically inexpensive to form and maintain. There may also be less ongoing maintenance in the form of paperwork and fees than other types of business structures.

Benefits of an LLC

One of the biggest advantages of an LLC is that it can offer personal liability protection. If your business is sued or defaults on debt, your personal assets could be protected. This means you might not lose your car, house, or bank account in such a situation.

This protection stems from its legal separation. In addition, if your business declares bankruptcy, the case could be considered separate from its owners.

Just note that this personal liability protection does not cover your business. You should still carry the proper small business insurance to help protect your business from loss in a variety of situations.

In addition, it may not protect you if someone sues you due to your wrongdoing. It also does not help when you personally guarantee a loan or contract.

As an LLC, you’ll have a few options when it comes to your tax situation. This could help you create a tax strategy that meets your goals and individual situation.

The default option is that LLCs are taxed as pass-through entities, like sole proprietorships. However, you can elect to be taxed as an S corporation or a C corporation.

An LLC could provide you with more credibility than an informal business structure like a sole proprietorship. This might help customers trust you more, making your business more marketable. Plus, banks could see you in a better light which may make it easier to take out loans and manage other forms of business.

Do I Need an LLC?

Some small businesses have more innate risk than others. For example, bakeries could face legal liability if something went wrong with their product.

If your business falls into one of these categories, you should consider forming an LLC. This business structure could help offer you the financial and legal protection you need.

In addition, having co-owners or employees can also signal an LLC is the right choice for you. The operating structure could help prevent conflict among business owners. Plus, the structure might help protect you from the actions of a co-owner or an employee.

If you have not yet started a business, now could be the ideal time to make your structure official. Doing so could be easier than switching everything later. However, even if you are already operating, forming an LLC has many benefits that can outweigh some hassles.

If you are considering expanding your business to have more than one owner, switching to an LLC might be worth the time it takes to do so. Taking advantage of the tax benefits from forming an LLC can also make it worth it.

When an LLC Is Not the Best Choice

While LLCs can be the perfect business entity choice, in some circumstances, they are not. For example, LLCs cannot issue stock. If you want to be able to do so and take on investors, you may want to consider a corporation.

In addition, some states do not let you form an LLC if you are a licensed professional. This may include being a doctor, lawyer, accountant, architect, or engineer.

However, your state may allow you to form a professional limited liability company, professional corporation, or professional limited liability partnership. Always check with your state before making significant business changes.

How to Set Up an LLC

Forming an LLC is done at the state level. This means you need to check with your state on the exact requirements for forming and maintaining your LLC.

There is a cost to forming a small business LLC. The state filing fee will depend on your state. If you use a professional LLC formation service, this might also incur a fee.

You can also file the paperwork to set up your LLC on your own. You’ll need to do a little bit of research on exactly what is required from you.

In general, you’ll need to follow a few steps:

  • Choose a name
  • Choose a registered office for your address
  • File your certificates of organization
  • Create an operating agreement
  • Apply for an EIN

Once you form your LLC, there may be an annual fee and required annual reports. These requirements will vary from state to state.

How to Make the Most of Your LLC

Once you form an LLC, you should open a separate LLC bank account. Bring your formation documents into your bank and they can help set you up.

Your personal and business finances should be kept separate. Failure to do so can result in you losing some of your liability protection due to commingling funds. It can also make it more difficult to grab some of the tax advantages available to you.

It’s also important that you carry the right insurance for your business. Changing your business structure can nullify some insurance coverages. In addition, your needs may change a bit.

Make sure to talk to an insurance provider that specializes in working with small businesses. They can help make sure you have the insurance protection your business needs.

Could an LLC be the Right Structure for Your Business?

When you have your own small business, making the right decisions when it comes to legal, insurance, and tax considerations can be confusing. But if you carefully weigh the factors involved in an LLC, you’ll be able to answer, “Do I need an LLC?” for your small business.

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