Should I Start 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 simplicity 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

LLC Advantages

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.

LLC Cost

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.

Do I Need an LLC?

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
• Type of business

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.

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.

LLC vs S Corporation

Being taxed as a default LLC works best for business owners who choose to reinvest profit back into the business and the S corporation (S corp) tax status is best for businesses that want to distribute most of the profit to owners.

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.

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.

How to Form an LLC

Forming an LLC is easy. Our state-by-state LLC formation guides streamline the process into easy steps.

LLC Taxes and Maintenance

Limited liability companies, whether they’re a single-member LLC or multi-member LLC, are subject to pass-through taxation.

Unlike a corporation, an LLC’s income is only taxed at the individual level. In a corporation, business income is taxed once at the business level and again at the individual level. This is referred to as “double-taxation”.

Sole proprietorships are also subject to pass-through taxation, just like an LLC. There are two main differences between running your business as a sole proprietorship vs LLC:

• Sole proprietors aren’t protected from personal liability
• Sole proprietors can’t elect S corp tax status

As an LLC grows, it can also choose to be taxed as an S corporation. The main S corp tax benefit is that business owners are no longer required to pay self-employment tax. This can lead to tax savings under the right circumstances.

Visit our LLC Taxes guide and our LLC vs S corp guides to learn more.

LLC Maintenance

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.

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.