Should you form an LLC?

Starting a business is one big to-do list: Big and small decisions must be made prior to actually opening your doors. The decisions don't end after launching, of course,  but in the early going, the tasks pile up quickly.

One of the more fundamental choices you'll make is your business structure. According to the U.S. Small Business Administration, nearly 29 million small businesses are currently operating in the country, and virtually every one one of them has decided on the structure that's best for them.

The option many have chosen is an LLC, or a Limited Liability Company. But what actually is an LLC? What are its benefits and drawbacks? Here's a brief rundown of forming an LLC so you can get an idea about whether it's the right match.

What is an LLC?
As its title implies, those who form an LLC do so to limit their liability. This means that in addition to lowering your vulnerability to being sued should someone be injured while at your store, farm stand or shop floor, your company is its own entity, meaning it's entirely separate from you as a citizen. However, under tax law, LLCs don't have the same independent distinction. This is actually a good thing because LLCs have the added benefit of avoiding double taxation because they're considered pass-through entities. The income an LLC generates "passes through" to its owners or investors.

What are the advantages?
Not being taxed twice is a clear perk of forming as an LLC, as you as an owner get to decide how you want to be taxed. This provides a tremendous amount of flexibility. LLCs also have the added benefit of being more nimble, because the paperwork filing and maintaining process is much less intensive than it is for corporations. Furthermore, there's no limit to how many owners you want to bring aboard. This can't be said for sole proprietors or S-corps.

What are the disadvantages?
Of course, just because LLCs aren't subject to double taxation doesn't mean they're not taxed at all. Filing business income on personal income tax documents subjects you to self-employment taxes. There are exceptions to this – such as if you decide you want to be taxed as a corporation – but generally speaking, self-employment taxes apply.

Another potential downside of an LLC is its viability as it relates to the circumstances of its owners. For example, should one of them want to leave the company, the LLC as constituted dissolves. The same is true if an owner passes away. So, while an LLC is flexible in some ways, it's rather inflexible in others.

A lot goes into your business structure and the Law Offices of Donald W. Hudspeth can help you makes sense of the process. We'll guide you every step of the way and offer our take on what structure we believe is the best fit.

Categorised in: Starting a Business in Arizona

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