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7 Things To Consider With LLC Formation

What is one thing a business owner should consider with LLC formation?

To help small business owners with their LLC formation, we asked business professionals and leaders this question for their insights. From determining the best state to form your LLC to reducing personal liability, there are several things to consider when forming an LLC.

Here are seven things to consider with an LLC formation:

  • Understand Changes to Your Daily Operations

  • Reduce the Risk of Personal Liability

  • Designate a Registered Agent

  • Choose a Unique Name

  • Specify the Ownership Interest

  • Minimize Paperwork

  • Determine the Best State to Form Your LLC

Understand Changes to Your Daily Operations

A business owner considering forming an LLC needs to first and foremost understand how that change will affect their day-to-day operations from a financial perspective. In particular, what does operating as an LLC mean in terms of how and what they can pay themselves (and their employees if applicable), what are the local, state, and federal LLC reporting requirements, and, of course, what will being an LLC mean come tax time. I think most business owners get hyper-focused on the tax implications (read: becoming an LLC will save me money on taxes!) and don't realize there are a lot of other things that come along with the change that they need to prepare and plan for - some of which they may not be able to manage themselves. I myself found the transition empowering, but only because I was guided by a team that knew what they were doing and kept me informed on what to do and when to this day!

Amy Zwagerman, The Launch Box

Reduce the Risk of Personal Liability

The primary benefit of forming an LLC is the entity’s ability to provide distance between you and the business while not relinquishing control. An LLC is simply the shell of a corporate structure, which means it will not be enough to avoid personal liability. This corporate shield can be shattered for those who engage in fraudulent activity or, most commonly, commingling personal and business funds—leaving you vulnerable to liability. That said, keeping your business and personal finances is important as this small side-step can breach the conditions of an LLC.

Than Merrill, FortuneBuilders

Designate a Registered Agent

Each state requires a designated registered agent for your LLC. Anyone over the age of 18 can serve as a registered agent, but it is worth considering designating someone within the company or hiring a third party to handle the task. In my case, I used a third-party service that could guide me through the process of forming my LLC and maintaining communication with the state.

Choose a Unique Name

When forming an LLC, it is important to choose a name that is unique. This will not only help you when forming the LLC, but it will also help you with your SEO later down the road. Choosing a name that is unique sets your business up for the most success and helps you differentiate yourself from your competition. It will also make forming the LLC much easier than if you chose a name that is already being used by other companies. Think long and hard about the name you want to name your company and choose something that helps you stand out from your competition.

Jeremy Gardner, MadeMan

Specify the ownership interest

I recommend that LLC owners take the time to determine whether they need to file as a foreign business entity under applicable state and federal statutes and regulations and seek legal advice if they are not sure which set of laws might apply to them. If you decide on an LLC, make sure you specify what type of ownership interest there is (what percentage each member owns). For instance, some members want equal voting rights; others might want those who invest more shares to be given preferential voting rights. The articles of the organization should be clear about how voting will work before any new issues arise. It also pays to have an operating agreement in place with rules for managing disagreements between members.

Claire Westbrook, LSAT Prep Hero

Minimize Paperwork

One of the benefits of an LLC is that there will be less paperwork in general. These entities are more flexible than other types of business incorporations such as S-corps and C-corps. It's important to have an LLC operating agreement. This will determine how your business operates. If you don't have one, you're bound by the specific rules of your state. With reduced paperwork, you'll have more time to do the things that are important for your business.

Evan Zhao, Revela Health

Determine the Best State to Form Your LLC

While forming your LLC in your state of residence might seem like the natural choice, there are other options that might provide better protection. As you will most likely file as a "foreign" entity in your state of business if you form elsewhere, the tax benefits are negligible. However, legal and privacy protections abound by forming elsewhere. Delaware offers substantial liability protection to its LLCs. Nevada and Wyoming enable LLC owners to shield their identities. Consider a state (such as Delaware, Nevada, or Wyoming) that will not impose additional taxes on the LLC for foreign ownership.

David Wachs, Handwrytten

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