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A limited liability company (LLC) is a legal business entity that affords its owner flexibility and financial protection. LLCs come in all shapes, sizes, and industries. A business with multiple locations and employees can operate as an LLC, as can a single entrepreneur who creates an LLC to grow their freelancing business.
Understanding the basics of what constitutes an LLC and how one operates can help you to decide if this business designation is right for you. To learn more, here are some frequently asked questions about LLCs:
No. Many people operate as sole proprietors or partnerships if they work by themselves or with partners. However, as your company grows, you may want to establish credibility with your business and protect it—and yourself—from lawsuits and financial liabilities.
Even if you do not need an LLC to operate your business, you may need other certifications, permits, or licenses related to your specific industry. An LLC is not a replacement for these requirements.
The key benefit to establishing an LLC is the limited liability it affords its holder. Limited liability in this context provides legal and financial protection to your personal assets if someone files a lawsuit against your business by separating your business and personal assets. Your house, car, savings accounts, and other private assets are protected if a case is filed against your LLC.
The cost of filing an LLC varies by state, with most states’ fees ranging between $50 and $200 to file. You also need to pay an annual fee to stay in operation, which also varies by state. Check the cost in your state before you file to get an idea of your business expenses.
You do not need an attorney or an accountant to file an LLC. Many states have self-service platforms online where you can complete the paperwork. These platforms can also send you physical documentation of your LLC, though some states charge an extra fee for this.
LLCs have different tax rates depending on how they’re run. If you’re the only employee of your company, then your LLC will likely be taxed as a sole proprietorship. As your LLC grows, it will be taxed as a partnership or corporation.
Consider meeting with an accountant to review the benefits of an LLC and learn how it could help or hurt you during tax season.
An LLC might help you to secure funding because it establishes credibility in your new business. Some investors look for established companies to support, rather than individuals. However, if you’re seeking large funding options from venture capitalists, you may be better off forming a corporation.
Know that there are multiple funding options available to you, so you don’t have to base your business’s status solely on your financial needs.
The decision to become an LLC should not be taken lightly. Do your research to understand your options and learn about the cost and value of operating as an LLC in your state. With careful planning, you can guide your business forward.
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