4 Signs You're Ready to Form an LLC

Starting a new business can be exciting. There's so much to look forward to, but there's also a lot of planning involved. For example, forming your business often includes forming a company. How you form your company can impact things like your taxes and your personal liability. A Limited Liability Company, or LLC, is a popular choice for small businesses. If you're wondering whether filing an LLC is right for you, here are five ways to know if it's right for you.

You Need Personal Liability Protection

Having personal liability protection is one of the biggest benefits of forming an LLC. Personal liability protection means that if something were to happen to your business, your personal assets wouldn't be affected. This type of protection is offered when you form an LLC. In other words, the members of the LLC are only at risk for as much as they have invested in the company. Likewise, personal liability protection can also prevent you from getting sued. Instead, the LLC would be involved in the lawsuit, not you personally. If you'd like to have some insurance to protect your personal assets, having personal liability protection is imperative.

You Have Partners

You might think that LLCs are just for sole proprietors, but they can work for business partnerships as well. In fact, any company that has more than one member is considered a partnership. When filing an LLC, you can also take steps to include additional members other than yourself. In this type of formation, all members are considered as one entity, which means everyone involved in the partnership is protected under the LLC's limited liability. In addition, the IRS asks LLCs with partners to declare what percentage of the company each member owns, plus their income and deductions. Having this information as part of your company's formation acts as a type of agreement between the partners, which could alleviate confusion between members.

You'd Prefer Some Flexibility

Creating an LLC can offer you some flexibility. For example, most LLCs can decide whether they'd like to file as a sole proprietor or a corporation. If you choose to file your LLC's taxes as a sole proprietor then they will be treated like your personal income taxes. However, if you can file your LLC's taxes as a corporation, then you may receive a lower corporate tax rate for the first $75,000 your LLC makes in profit. Plus, you can lease your company's assets. If you work from a home office, for example, you can lease this office from yourself to your LCC so that it can be written off on your taxes as an expense. There are other additional benefits as well. For example, you can decide to include bigger contributions to your retirement funds and life insurance policies. This could allow you a nice nest egg for retirement or for your family's future.

You Don't Want a Board of Directors

Both S and C corporations must have a board of directors that is elected by shareholders. Having a board of directors could mean that your business is taken out of your hands and placed in the care of others. Even companies that are private, meaning they're not publicly traded, must have a board of directors, whether comprised of internal or external members. Many people who have a clear vision for their business would rather have control over its operations, processes and developments. People who aren't interested in having a board of directors often choose to create LLCs instead, because they don't require a board. Even if your LLC has partners, it's not required that any board of directors in formed. This often makes forming an LLC the most desirable option.

Filing an LLC

If you think it's time to create an LLC, be sure to review the laws in your state. Regardless, you're likely to see the difference once you have formed your LLC.