To LLC or Not to LLC?

Business.com / Legal / Last Modified: February 22, 2017

When starting a business, is it in your best interest to incorporate or form a LLC? Ask yourself these questions first.

Starting the business of your dreams calls for a lot of big-time decision making. The decision to quit your corporate job and jump into the world of entrepreneurship, the decision of choosing what sort of business you’d like to open, what to name it, how many employees you want, and finally, whether you’d like to file your business with the state or not. It’s a big move that most businesses end up making for all the benefits that come along with incorporating, but how do you know when you and your business are ready?

Before you file, be sure to ask yourself these four questions!

Are you familiar with how the taxing works?

Depending on whether you’re looking to incorporate your business or form a LLC, the taxing works differently. Both methods can end up saving you and your business some money when tax season rolls around. If you choose to form a corporation, salaries, as well as the business, will be subject to taxation. However, owners can split corporate profit among owners and the corporation, thereby lowering the overall tax rate.

A LLC, on the other hand, experiences something called pass-through taxation, which means that the net income and salary are the only things taxed, not the business itself. Additionally, the IRS has ruled that LLCs can now choose to be taxed either as a partnership, or as a corporation. So if pass-through taxation isn’t for you, you can always go the corporation route, even if you’re technically filed as a LLC.

Related: Do you have other legal questions? Educate yourself now.

Is your company looking to gain investors?

When your company is just starting to try and gain momentum, investors can prove to be a very beneficial asset. When your business is filed with the state, investors will be more likely to take an interest in your business. When you have a corporation, investors like the easiness of gaining and selling shares.

It’s a very simple process: an investor gives money to a corporation, and they receive a share of the company- that’s it. Whereas buying and selling shares for a LLC can be a little more complicated, but of course, still doable. Either way, an investor will be more likely to invest in a company if it is legally recognized by the state.

Related Article: 10 Things You Should Never Do While Pitching an Investor

Are you worried about the safety of your personal assets?

With both a corporation and a LLC, you are legally separating yourself from your business upon filing with the state. Before filing, you, your personal assets, and your business are all one in the same, so if you were ever to owe some serious money, your personal assets (like your car and home) could be taken as payment by the government.

When you form a corporation or a LLC, you are protecting your personal assets by keeping them separate from your business. That way, if your business were to ever owe a lot of money, that money could only come from the business, not you, the owner.

If you’re particularly worried about finances, and putting your personal assets at risk, filing with the state is probably the best choice for you.

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