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When Is The Best Time To Form An LLC?

By: SmallBizClub

 

considering whether to start an l l c an l l p or an inc

Starting a limited liability company (LLC) is not an overnight decision. However, an LLC is easier to start and maintain than other business structures. You still have to determine whether your business would benefit from it. The LLC is one of the most popular among small businesses since it protects the owner from the business’s liabilities and from paying double taxes.

What Is An LLC?

A limited liability company (LLC) is a type of business structure that provides limited liability protection and taxation choices. The main aim of an LLC is to separate the business’s assets from the owner’s assets. This frees the owner from any liabilities and credits of the business.

It shouldn’t matter where you’re physically located when forming an LLC. For example, it’s easy to form an LLC in Texas since you can even do so while in another country because you have the option to do it online. An LLC is one of the smartest asset protection for businesses.

Why You Should Form An LLC

  • Limited Liability Protection

Limited liability protection is one of the greatest advantages of an LLC because its main goal is to protect the owner from any form of burden in cases of the company being sued or going bankrupt. This is good, especially for entrepreneurs who are just starting their businesses. They want to avoid putting their personal assets at risk if anything goes wrong.

Limited liability protection, however, cannot protect you if you commit fraud or any activities of that sort, as the court would be forced to go against your LLC privileges. Otherwise, forming an LLC is good for your business since it protects you in most cases.

  • Taxes

Since an LLC is usually a pass-through business, it makes sure that taxes are paid once. Any profits or losses of the business go to the owner, so they only get to pay their taxes once, either as an LLC or as separate entities. Suppose the limited liability company consists of more than one owning party. In that case, they might decide to pay as single entities or as a company and then share profits after paying the taxes.

An LLC allows you to pay either as an S-corporation or a C-corporation. The main difference between an S corporation and a C corporation is how they deal with their tax obligations. An S corporation does not have to pay income taxes directly. While a C corporation must pay taxes on its corporate income, shareholders must also pay taxes on the gains distributed as dividends.

  • Less Strenuous

One of the reasons why the idea of an LLC was ever formed was to create a less complicated business structure. In some states, forming an LLC is so easy; all you have to do is pay a certain fee and file the papers for the organization. Sometimes you also have to file the organization’s articles annually to keep it running without any problems.

When To Form An LLC

  • When You Need Asset Protection

Suppose your LLC gets a lawsuit or is burdened with a tremendous debt. Only the assets of the limited liability company can be claimed by the creditor, leaving your personal assets untouched. So, if you feel your business is getting riskier, you might want to register your business as an LLC and protect your personal assets. This protection is called the corporate veil; it puts a distinction between your assets and those of the LLC.

  • When You Want Tax Flexibility

You can reduce the burden of your taxes by forming an LLC. It allows you to choose how you want to pay your taxes. You can choose to pay as an S corporation, a C corporation, or as a pass-through entity. It allows you to choose who pays the taxes, the LLC itself, its owner, or its partners.

The choice of who pays the taxes can be made after carefully considering the most beneficial decision for all the parties involved. If you think you will have difficulty paying taxes in a sole proprietorship business structure, consider forming an LLC.

  • When You Want To Formalize Your Business Structure

While a sole proprietorship is nice, an LLC is more formal and recognizable. This is because, as a sole proprietor, you cannot acquire exclusive rights to your company, but as an LLC, you can do that and avoid anyone else using a name close to your business. This brings legitimacy to your company as its name cannot be used for purposes other than your own.

  • When You Have Enough Funds To Pay The Filing Fees  

Don’t rush into forming an LLC when you don’t have enough budget. Unlike a sole proprietorship, an LLC requires licenses to run, and you’ll also need to pay the filing fee for your organization’s articles to your state. You’ll also need to pay an annual fee to run a limited liability company.

  • Before You Start Your Business

It is a smart idea to start your LLC before you even start your business. This way, you can avoid trying to transition while your business grows. Forming your LLC before you start your business clearly distinguishes between the company’s assets and liabilities and your own.

  • Before You Enter Into Any Contracts

Forming your LLC before entering any contract or selling any goods protects you from any lawsuit that could come. Unlike if you form your LLC at a later stage, which could affect you in the future without the LLC’s protection. This prevents you from going bankrupt if the business goes through financial hardship.

Final Thoughts

One of the most fundamental parts of starting a business is deciding which business structure is most suitable for you and your organization. Forming an LLC comes with different sets of advantages and disadvantages.

Once you have decided to push through with an LLC business structure, consider the following items as you move forward with your venture. Do it at the right stage of business formation, so you do not get into any liabilities without protecting your personal assets.

Author: Ralph MacCliff is a Miami-based business consultant. He has written several blog articles to share some of the knowledge he has gained over the course of his ten-year career. He enjoys mountain hiking, swimming, and reading fiction stories in his spare time.

Published: December 5, 2022
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