Sunday, May 6, 2012

Forming an LLC - A Brief Introduction for the Smart Entrepreneur

If your business is one of the fortunate ones that survived the recession, it's not yet time to celebrate. The country is but slowly recovering and you may need to consider forming an LLC to protect personal and business interests better.

What is it?

A limited liability company (LLC) is a business entity that has similar aspects to that of partnerships and corporations. In this setup, the business owners are called "members" and not partners or shareholders.

Why should a business owner consider forming an LLC?

The primary benefit is that it separates personal property from company property. If you and several investors opened a firm and you run your company via a sole proprietorship model, there is a chance creditors can run after your personal property in case your business goes bankrupt.

By forming an LLC, you protect yourself from losing everything you earned. Once you undergo the necessary process, the law now sees your personal property as an actual personal investment from your trade investments. Creditors cannot consider touching personal property or making any legal move towards forfeiting it.

Another benefit is its taxation model. LLCs only have a flow-through taxation variant, meaning it is only taxed once. Corporation models when compared with this setup are taxed twice. One for its earnings as a business (corporate taxes) and another tax will be targeted towards each shareholder for their revenues received (individual taxes).

What should I know if we are going to form an LLC?

You should know the advantages and drawbacks so you come in prepared. A possible advantage is its unlimited number of members. Members can be as much as three or thirty if prospective members agree to this number.

Another prospective strength is that it does not require meetings, minutes of meetings, and company by laws. The company can choose when they will call member meetings whether this should be on a regular basis or if this should come through as per need arises. Since by laws are not necessary, it means not being limited to these when conducting business decisions.

A possible drawback to think over is its membership features. A member cannot easily transfer his or her membership to another person without others approving this move. If a member dies, suddenly goes and leaves, or becomes bankrupt, the LLC is instantly dissolved.

What does it take to form an LLC?

Filing all papers and paying fees are what it takes to form an LLC. Required documents include a company's "Article of Organization" that must meet state guidelines and requirements. Fees may vary depending on the firm's state and city location.

Filing and paying the charges are possible through three methods: (1) hiring a lawyer, (2) employing a company specializing in business, and (3) performing a do-it-yourself (DIY) approach. Having a lawyer do everything for you can mean paying fees by the hour, while doing it on your own can mean devoting much time and effort. If these situations do not seem favorable, choose a firm that can offer competitive rates so you save time and money.

When you are hiring a firm to form an LLC, make sure to get all the services they offer in writing. The contract presented should include costs you will pay, the service they will render, and the time span when all these will push through. By having these written, both parties know their obligations and rights.

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