Do You Need an LLC for Your Small Business?
Small business owners should consider the following factors when deciding if an LLC is the right choice:
- Level of risk
- Potential profit
- Credibility and consumer trust
Risk and Limited Liability
Small businesses could face risks such as product liability, personal injury, and/or trademark infringement.
Any business that carries risk needs to be legally separated from its owner.
This separation is known as limited liability protection.
Limited liability protects a business owner’s personal assets (ie., car, house, and savings) in the event that a business is sued or defaults on a debt.
Profit and LLC Taxes
A small business that earns a steady profit can benefit from the flexible tax options that an LLC offers.
LLC owners can choose between pass-through taxation or the S corporation (S corp) tax classification.
Pass-through taxation works best for businesses with less profit and the S corporation (S corp) is best for businesses that need to carry substantial profit over from year to year.
Visit our LLC vs S corp guide for help with choosing how your LLC should be taxed.
LLC vs Corporation
Limited liability protection is created by forming and maintaining an LLC or corporation. But which business structure is right for your food truck business?
A corporation is only useful for business owners that must rely on outside investors. This is because of the way corporations are taxed. A food truck business might benefit from starting a corporation if outside investors are important.
Any small business that doesn’t need outside investors will do better at tax time by choosing an LLC.
Credibility and Consumer Trust
Small businesses rely on consumer trust and recurring purchases. Credibility plays a key roll in creating and maintaining any business.
Businesses that form LLCs gain a level of consumer trust and credibility simply by forming an LLC.
What is an LLC and Why Form One?
A limited liability company (LLC) is a US business structure that offers the personal liability protection of a corporation with the pass-through taxation of a sole proprietorship or partnership.
By starting an LLC for your business, you can:
- Protect your savings, car, and house
- Increase your peace of mind
- Protect your privacy
- Allow for greater profit
- Allow for accelerated growth
- Increase credibility
Personal Liability Protection. LLCs provide personal liability protection. This means your personal assets (car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.
Tax Benefits. LLCs and have options to customize their tax structure. This allows businesses to use the best tax strategy for their circumstances.
Growth Potential. LLCs can grow in profit and risk because they provide personal liability protection and tax benefits.
Credibility and Consumer Trust. LLCs generally earn more trust from both banks and consumers than do informal business structures like sole proprietorships. This can impact a business's ability to take out loans and can affect marketability.
The main cost of forming an LLC is the state filing fee, which ranges between $40 and $500, depending on your state. Our Cost to Form an LLC guide details LLC fees for all 50 states.
There are two options for forming your LLC:
- You can hire a professional LLC formation service to set up your LLC (for an additional small fee).
- Or, you can use our free Form an LLC guide to do it yourself.
When to Form an LLC
Becoming an LLC is the next step in growing your business and protecting your assets. You should form an LLC when you are serious about growing your business and earning a profit.
LLC Taxes and Maintenance
Single-member LLCs are taxed as disregarded entities by the IRS. This means the LLCs income passes through to the owner’s tax return. LLCs and sole proprietors are taxed in the same way but LLCs offer limited liability.
Multi-member LLCs are taxed as a partnership by the IRS. Again, this means the LLCs income passes through to the owners’ tax returns.
Pass-through taxation is beneficial to most small businesses because the LLC profit and distributions are only taxed once.
As an LLC grows, it can also choose to be taxed as an S corporation. This allows more profit to be carried from tax year to tax year without excessive taxation.
In order to have limited liability protection for your personal assets and maintain good standing for your LLC, you’ll need to:
- Open a business bank account
- Maintain your corporate veil
- Meet compliance deadlines, such as filing annual reports
- Stay current on your tax reporting
Open a Business Bank Account
Using a dedicated business banking account is essential for personal asset protection.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your LLC is sued. In business law, this is referred to as piercing your corporate veil.
Maintain Your Corporate Veil
When a creditor of an LLC goes unpaid, the creditor may sue the business’s owners, asserting that they should be personally liable for the business’s debts. This is known as piercing the corporate veil. Creditors may be successful in piercing the corporate veil when:
- The business is severely undercapitalized
- The business and its owners did not maintain their separate identities in their business affairs
- The actions of the company were fraudulent or wrongful
Visit our LLC Corporate Veil guide to learn more about how to maintain personal liability protection.
Meet Compliance Deadlines (Annual Report)
After forming your LLC, it is important to stay on top of your state's filing deadlines to remain in good standing and avoid unnecessary fines and penalties.
Filing an annual report, sometimes referred to as a biennial report, is required in most states. Some states also charge an annual fee.
Visit our Cost to Form an LLC page to learn more about the cost to form and maintain an LLC in your state.
Stay Current with Tax Reporting
Most LLCs will need to report their income to the IRS each year using:
- Form 1065 Partnership Return (most multi-member LLCs use this form)
- Form 1040 Schedule C (most single-member LLCs use this form)
How you pay yourself as an owner will also affect your federal taxes. Visit our guide to learn more about how to pay yourself from your LLC.
Our LLC Taxes guide is a free resource for LLC owners.
Form an LLC
Forming an LLC is easy. Our state-by-state LLC formation guides streamline the process into five easy steps.
Five Basic Steps to Start an LLC
Step 1: Select a State
Step 2: Name Your LLC
Step 3: Choose a Registered Agent
Step 4: File the Articles of Organization
Step 5: Create an Operating Agreement
Step 1: Name Your LLC
You will need to provide your state with a unique name that is distinguishable from all registered names when you file your LLCs formation documents.
DBA Transfer for Existing Businesses
You may already have a DBA name for your sole proprietorship (or partnership) that you will want to carry over to your new LLC. The steps for transferring or converting a DBA name vary from state to state.
We recommend selecting your state on our Form an LLC guide to learn more about searching and registering your business name.
You may also need to contact your state for specific directions on how to transfer your DBA registration. You can find your state's contact information on our guides.
Step 2: Choose an LLC Registered Agent
Your LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Step 3: File Your LLC's Articles of Organization
The Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization in some states, is the document you will file to officially register an LLC with the state.
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
Step 5: Get a New EIN or 'Transfer Existing EIN
Get an EIN
An Employer Identification Number (EIN) is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS. Visit our EIN guide for instructions for getting your free EIN.
Transfer an EIN
According to the IRS, sole proprietors that incorporate (eg., form an LLC or corporation in IRS language), must get a new EIN.