An LLC, or Limited Liability Company, shares many similarities with corporations, although an LLC has a different legal structure. As with a corporation, when you register your company as an LLC, you will receive many of the same advantages as corporations, such as personal liability protection. However, many people prefer forming an LLC instead of one of the traditional corporation types because you avoid having to pay the additional taxes that corporations have. On the other hand, with an LLC, you can’t go public, so this may dissuade you from forming an LLC. In some ways, an LLC serves as a cross between a corporation and sole proprietorship or partnership, offering advantages from each structure.
Just as when incorporating your business, forming an LLC requires a process of filling out forms and paperwork. In fact, an LLC usually requires more paperwork than general corporations, so you may need to get some help in filling out the forms. It costs about the same to form an LLC as it does to incorporate your business, which means anywhere from $200 to $1,000, depending on the state you operate the business in. Generally, you’ll find it least complicated and most cost effective when you form an LLC in your home state. This way, you can avoid paying franchise taxes and filing annual reports in two different states.
However, you may benefit from the advantages of registering your LLC in a different state, especially if your state has high set-up costs or if you plan to expand your company to multiple states. Also, some states require that you have at least two partners if you form an LLC, so if your business is a sole proprietorship, then you might consider registering in another state. Some states have many business-friendly regulations, and consequently, many businesses throughout the country have initially registered in these states. Delaware and Nevada, for example, have low incorporation fees and LLC fees, and more than half of the companies on the NYSE are registered in Delaware. If you choose to register in a different state, then remember that you have to also qualify to do business in the state where you will run your business, and pay a state fee.
The major benefits of forming an LLC include personal liability protection and lighter taxes. Personal liability protection allows you to separate your personal finances from your business, so that if your business falls into financial or legal trouble, you will not personally lose money or assets. The only money you stand to lose is the money you put directly into the company. All corporations have personal liability protection of some form.
An LLC differs from other corporations because of the different tax structure. In other corporations, you have to pay double taxes – once for the corporation entity and once for the shareholders’ stocks. In an LLC, the only taxes you pay are based on the company as if it were a sole proprietorship or partnership, not a corporation. LLCs also often work well if your business has foreign investors, because unlike some types of corporations, an LLC doesn’t face foreign restrictions.
You can find quotes and information on LLCs online at several Web sites, including Business Filings Incorporated (www.bizfilings.com). You can get quotes on forming either a corporation or an LLC in any state, as well, to start your search for a structure that matches your new business.
By Lisa Zyga