Choosing a business structure can be an arduous process. Notably for entrepreneurs, options available to incorporate as including but not limited to, the following:
- Sole Proprietorship
- Limited Liability Corporation (LLC)
- Limited Liability Partnership (LLP)
- S Corporation
- Non-profit Corporation
With an array of selection available, it is not surprising that the decision-making process to determine which structure is appropriate can be overwhelming for a start-up. Picking the best legal structure for your business requires knowledge of your trade, and an understanding of local, state, and federal laws. Tax laws are continually changing, and the need for capital is unabating; hence entrepreneurs need to assess which business structure offers them the benefit of cost-conscious and help them develop.
In the previous article, a comparison between LLP and Private Limited Company saw LLP being a more appropriate entity for start-ups due to its salient feature of liability protection. Likewise, in the offering of liability protection, LLPs have an advantage if a new business owner prefers more passive ownership with no management responsibility and lower liability as limited partners. All LLC owners have the same liability protection if not even more as it offers liability protection to all the members of the company, unlike a limited partnership, which only provides liability protection to limited partners.
Differing from a sole proprietorship, LLC provides a legal business entity that has a separate legal identity that is separate from your personal identity as the business owner. This might sound like a minor distinction, but it matters. Setting up a legal business entity for your business makes your business “official.” Instead of conducting business as an individual person and having your customers pay you directly, setting up an LLC gives you the ability to do business as a business. Ensuring the business exists as its own separate legal entity is useful in helping budding entrepreneurs in numerous ways and equip them with tax-saving instruments to manage their business finances efficiently.
The LLC is, in some ways, the best of both worlds. The entity allows for the flexibility of a partnership or sole proprietorship, but, as the name suggests, limits the liability of those involved, like a corporation. An LLC is usually a lot like an S corporation. It offers a combination of some limitation on legal liability and some favourable tax treatment for profits and transfer of assets. S corporations are corporations that decide on a different way to pay yearly income taxes. As opposed to the corporation paying taxes, the proprietors pay the company’s income, losses, deductions, and credits.
As a new business entrant, if you have substantial personal assets that you wish to protect and not involve in your business, an LLC might be right for you. On the same note, if you are in an industry where lawsuits are common, having an LLC as your business structure can potentially protect your personal assets. LLC being a newer form of a legal entity, the structure varies amongst countries and even from state to state. As such, the advisability and benefits of forming one certainly differ vary. Getting an experienced third party’s opinion if you are interested in setting up an LLC is always a good idea.
Benefits of LLC
- Lesser Paperwork and Procedures
An advantage of LLC is having less administrative work and required filings. However, it does not mean there is no paperwork at all. In fact, it is strongly advisable to create an operating agreement (especially if you have partners). This sets forth the governance of the LLC, such as with voting, allocation of profits/losses, compensation, authorizations and so on. An operating agreement can be an effective way to allow for stronger management.
LLCs are able to pass-through taxation without limitations on the number and the type of owners they can have. On the other hand, S corporations, for instance, can only enjoy pass-through taxation with the following ownership restrictions:
- Less than 100 shareholders
- No foreign shareholders
- No corporate shareholders
A formal corporate management structure consists of a board of directors that oversees company policies and officers who run the daily business. The shareholders who are also the owners must meet yearly (also known as annual general meeting – AGM) to elect directors and conduct other company business. In the case of an LLC, this formal structure is not necessary, and the business owners have more choices about the way they run the business and make decisions.
- Profit Distributions
There is great flexibility in the distribution of profits to owners, and it is not necessary to distribute them equally or according to ownership percentages, unlike corporates that must distribute profits to shareholders according to the number and types of shareholdings.
- Perpetual Existence
Harnessing the characteristics of a corporation, an LLC has a life of its own and can continue to exist after the owners sell their shares or pass on.
Common Business Types assuming LLC Business Structure
Online businesses and start-ups are one of the common businesses undertaking the LLCs structural since it allows small groups of people to form a company together easily. In general, an LLC works well for early-stage start-up unless there are plans to raise significant investment money. Some nature of businesses (E.g. Financial companies such as banks, financial trust companies and insurance agencies) are unable to file as an LLC. However, with proper structure, there are still chances of successful applications.
Making the Smart Decision
Simple and adaptable business structure is what an LLC offers for small businesses and start-ups. Comparing to other entity types, entrepreneurs may find it easier to maintain an LLC due to its hassle-free characteristics. The bottom line is that conducting business as an LLC helps protect an individual’s personal assets from a misadventure while opening additional opportunities for your business to develop. Nonetheless, new business forays can land entrepreneurs in the hot seat if the firm’s fundamental structure is not well chosen. It is highly recommended to seek opinions from subject-matter experts to prevent such situations and ensure the new business grows.
As a partner who grows with your business, Desfran provides a suite of business solutions which includes new market entry consultancy services, new market requirements like business incorporation and registration, establishing banking relationships, marketing services, and regulatory compliance, all of which can all be fulfilled through Desfran’s bespoke solutions. We continuously stay on top of trends and movements in the financial industry to help your business grow by identifying, maximising your business potential while providing comprehensive customised solutions.