Yes it makes a lot of sense for you to set up a limited liability company (LLC). Here’s a brief breakdown.
Why it makes sense to set up an LLC
- It’s relatively affordable and easy to set up.
- You’re able to avoid personal liability from the debts and liabilities incurred by the business.
- In many states, the identification of LLC members may remain anonymous.
- There’s no limitation on the number of LLC members.
- There’s a lot less paperwork involved with maintaining an LLC as compared to a corporation. Annual state reports are required to be filed with a certain fee and you have to disclose who your “members” are and what percentage each one owns in the company. Only a few states like NY require you to create an operating agreement which details the rules/responsibilities of its members (even if you’re just a single-member LLC).
- It’s not taxed as an entity because it’s considered a “disregarded entity” by the IRS. In other words, profit or losses are passed directly to the members of the company, which are typically correlated by their ownership percentages. This is in stark contrast to c-corps where the company income is taxed at the corporate tax rate and shareholders also pay tax on the profits that are distributed (referred to as “double taxation”). This isn’t the case if you choose to be taxed as a s-corp though (more about that ).
Why it doesn’t make sense to set up an LLC
- The laws covering LLC are relatively new and not settled like corporate law.
- LLCs are usually subject to self-employment taxes (unless you choose to be taxed as a s-corp).
- Not ideal if you have any intention of raising money from investors. LLCs are a contract-based creation, so it’s tough for investors to value a company based on membership percentages (compared to stock in a corporation), which is easier to put a value on. On the other hand, c-corps are more suited for medium to large businesses with many shareholders (like investors and advisors) because of their stock structure/financing flexibility.
- You can’t write off fringe benefits to yourself or employees. Unlike c-corps, you can’t deduct the cost of benefits paid by the LLC. You also can’t issue stock options as incentives for your employees.
Based on the limited info provided, an LLC seems to be ideal for your business. If you’re looking for a quick and cost-effective way to form your LLC, feel free to stop by. The attorneys on our site have years of experience helping companies lift off the ground and our site offers unique pricing options to make it work for all companies.