Want to Start an LLC? This is What you Should Know Before you Decide.
The absolute easiest way to start a small business is to launch as a sole proprietorship. You act as the business and claim all profits and losses as your own. You don't have to file taxes separately or complete any paperwork to run your small business as a sole proprietor.
You might choose to file a DBA, or "Doing Business As" claim to operate under a name other than your own. You also may want to claim an EIN so you don't have to use your personal Social Security number on forms like W9s that clients see. This is all optional.
But as you grow, you'll likely want to switch from being a sole proprietor to setting up another business entity.
Legal Designations Available to Your Small Business
As a sole proprietor, you receive no liability protections. Should anything go sideways, someone could sue your business and go after your personal property as part of their suit. There's no separation between your business assets and your personal assets.
No one plans to be sued, of course, but things happen and it's better to be prepared. When you operate as a more formal business entity, you are better able to protect your business and yourself.
If you're considering changing your business structure, you can switch to one of the following designations:
- C Corporation
- S Corporation
- Limited Liability Company (LLC)
The next step is determining which of these structures makes the most sense for your small business.
Choosing Between a Partnership, Corporation or LLC
Assuming you're the sole owner of the business and don't have co-owners or co-founders, you probably want to focus on forming a corporation or limited liability company.
A corporation designates a business as completely separate from its owners, which provides those owners with the most legal protections — but forming a corporation comes with a high cost. Unlike some other legal designations, businesses classified as Ccorporations must pay their own income tax on profits. You could consider an S corportation instead, which is different than a C corporation. The big difference between the two, and the big advantage of an S corp, is that S corps can choose pass-through taxation. But LLCs are taxed this way, too — and easier to set up and administer than both types of corporations.
For most small business owners, forming a limited liability company makes more sense than a corporation when they make the switch from being a sole proprietor to being a more formal business entity. LLCs come with a lot of advantages for small businesses, including the fact that they're very simple to set up and maintain (and cheaper to establish than some other structures). Plus, they offer protection from personal liability. LLCs also give your business the ability to generate pass-through income. This means you'll likely pay less tax on the same earnings as you would as a sole proprietor and won't be subject to corporate tax rates.
The biggest drawback to an LLC is that it can limit your ability to raise funding. If you think you may want to gather investors or issue stock in your company at some point in the future, a corporate structure might make more sense for you.
The Next Steps for Your LLC
If you're ready to file as an LLC, you simply need to register with the state in which you wish to do business. Each state will have a different filing process, but in general you should be prepared to:
- Name your LLC
- Name the owner of the LLC (or "registered agent")
- List the business address from which you operate
- Pay any associated fees for filing (which can range from $100 to a few hundred dollars, depending on which state you're located in)
Once you take care of the legal setup of your limited liability corporation, you may want to market this change to your audience and clients. Growing into an LLC signals you're serious, legitimate and poised for growth — and it can serve as a sort of social proof that your company is going places.
Take advantage of this change by updating your business name in bylines, profiles and accounts. You can also flag your new status with an .LLC domain name. Because this is a brand-new top-level domain, small business owners who act fast have a chance to register widely used or popular names for themselves.