Whether your idea for your business started in your basement or in a board room, one thing remains the same: you must make certain decisions before your business opens. One of these decisions is whether or not to keep your business as a sole proprietorship, find a partner and create a partnership or incorporate your business into a corporation.
There are benefits and downsides to each type of business arrangement. However, one type of ownership arrangement is gaining popularity with people who are creating small, sometimes home-based businesses: the limited liability corporation.
A limited liability corporation is a hybrid of the traditional corporation set-up and a sole proprietorship. The main benefit for this type of business arrangement is that the owner has limited personal responsibility for the financial aspects of the LLC. In an LLC, an owner’s financial liability lies in the amount of capital the owner put down to start the business.
Like any business choice, a limited liability corporation has benefits and disadvantages. Some of the advantages of creating a limited liability corporation include:
• More flexibility in taxation. Owners of a limited liability company can choose what way they want it to be taxed. For example, they can choose to be taxed as a sole proprietor, partnership, S Corp or C Corp on their tax return.
• Limited liability companies can be set up with as little as one person in the company.
• Less paperwork to file with the federal, state and local governments than with a regular corporation.
Some disadvantages of a limited liability corporation include:
• Some creditors will make owners of limited liability companies cosign for loans given to their companies. This makes their personal assets liable in case of default. This essentially cancels out the point of making a LLC in the first place.
• It can be harder for owners of limited liability corporations to raise capital from investors. Investors are more weary of LLC’s and therefore do not like to loan money to them.
• Some states don’t treat LLC’s the same way they treat regular corporations. Some states even consider LLC’s a sole proprietorship, which again defeats the purpose of making a business a limited liability corporation.
With any business decision, it’s important to not only weigh the pros and cons of your decisions, but to also seek the advice of mentors who are experts in setting up businesses. For example, when deciding how to classify your business and set up your business plan, it is a good idea to visit with professionals at your local Small Business Administration office. The experts at the SBA can take a look at your business and determine what business classification would best serve your business’ needs. When it comes time to file the paperwork for your business, it’s a good idea to employ the services of a corporate attorney who thoroughly understands the laws of incorporating a business and can ensure that you are on the right path to proper business ownership.
Creating a business is never an easy task. But, by doing your research and enlisting a good team of people on your side, you can create a limited liability corporation and grow your business from your dreams to reality.