LLC Formation: the Good, the Bad, and How to Do it Right

New businesses launch all of the time, but 2021 saw record-setting numbers at over 5 million new businesses. Of course, many of those businesses are sole proprietorships with people launching freelance careers. Even solopreneurs run the risk that they’ll get sued at some point.

There are a number of ways that you protect yourself, but one of the most common and popular methods is LLC formation. Not sure what an LLC is or what you get out of forming one? Keep reading.

We’ll cover the good and bad of LLC formation, as well as how to form an LLC.

What Is an LLC?

An LLC or limited liability company is a specific business structure. It is made up of members who essentially own and operate the business. You can use individuals as members or form an LLC with other businesses as the members.

It offers the members similar protections to those enjoyed by corporations. It’s typically much easier to set up and requires less annual paperwork.

Why Form an LLC?

There are several reasons to form an LLC. The most significant reason for most business owners is that an LLC helps protect your personal assets if you get sued. Some can go after the business assets like saving accounts or equipment, but they can’t try to seize your home.

LLCs operate as pass-through entities for tax purposes. With pass-through entities, you don’t typically file a separate tax return for the business. Instead, any profits or losses for the business go onto your personal tax return.

The LLC formation process is comparatively simple. In fact, it’s simple enough that most people don’t need a lawyer to do it. However, consulting a lawyer is a good idea.

LLC Pitfalls

The liability protection for an LLC isn’t absolute. If you mismanage funds or engage in fraud, a court may “pierce the corporate veil” and go after personal assets.

How to Form an LLC?

In most states, LLC formation takes a few standard steps. You must pick a name for the business and decide on a registered agent. Registered agents receive any legal paperwork.

You file articles of organization with your state that provide basic info about your business and pay any associated fees. Get an employer identification number.

You should also draw up an operating agreement if the business has more than one member. That helps prevent problems later. For financial clarity, you should get a bank account for the business as well.

LLC Formation and You

LLC formation is a savvy move for most small businesses. It helps protect your personal assets from any legal problems the business might experience. Yet, it limits the paperwork involved come tax time.

You can also set up the LLC yourself with little or no assistance from an attorney, although getting input is often wise. Creating the LLC itself is typically easier and cheaper than creating a corporation.

Looking for more tips on setting up or running your business? Check out the posts over in our Business section.

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