Bringing Business Around: Should Your Company Form an LLC?

Brooke Chaplan

September 16, 2016


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There is more to running a business than simply selling your products or services to customers. You have to think about the legal ramifications of your business structure as well as the tax implications of how you choose to organize your company. When is it in your best interest to form an LLC? If you are thinking about going this route, here are some things to consider first.

Do You Need Protection from Liability?
Doing business as a limited liability company may be beneficial if there is reason to think you could face a lawsuit from a client, customer, or employee. Even if you could successfully represent yourself in court, you don't want to expose personal assets to liquidation if you can avoid it. It is best to consult with an expert with a masters in criminal law before going ahead with your formation.

Forming the LLC May Be Easier than Forming a Corporation
You can form an LLC with just a single member in most states, and you may be able to choose how it is taxed. Therefore, you could get the same tax benefits or protection from liability by opting to create an LLC instead of creating a corporate entity. In most states, you simply pay a fee and submit a few pages of paperwork to the secretary of state to form such an entity.

LLCs Enjoy Pass Through Status
As long as you don't choose to be taxed like a traditional corporation, the LLC structure allows for pass through taxation. What this means is that company profits or losses flow through to the personal tax returns of its members. Therefore, income is only taxed once as opposed to being subject to additional corporate taxes. States may charge an annual fee to maintain your LLC status.

Make It Easier to Attract Investment Capital
LLCs are perceived as more formal and a serious attempt by the company's owner to establish a profitable company. It may be preferable to operate as such if you are looking for outside investors who aren't family members or friends. With an LLC, it may also be easier to create a formal ownership structure and formal exit plans for investors or others who wish to sell their stake.

As a business owner, you need to consider both your own financial health as well as the financial health of the company. Forming an LLC allows you to protect your own assets, which means you don't have to put your family at risk in case a customer gets hurt or another company sues for any reason. It may also allow you to attract outside investment, which can be a key source of capital when you first start a company.