When is the Right Time to Form an LLC?

Businessman checking his watch.

Whether you are currently operating a sole proprietorship or just thinking about starting a business, forming a limited liability company is a good option to explore.

There are many reasons to form an LLC, but depending on factors like the nature of your business, the size of your company, and your goals for growing your business, it may or may not be the best time to do so.

What Is an LLC?

The limited liability company is a highly popular business structure, due in part to its flexible nature. An LLC can operate with one individual owner (single-member LLC), or it can have an unlimited number of owners who share control of the company (multi-member LLC). The primary reason for forming an LLC is the personal asset protection it provides — if your business is sued, your LLC’s structure shields your personal assets (house, car, bank accounts) from creditors.

Another major benefit of an LLC is its pass-through taxation model. This means that any company profits and/or losses are not claimed on a separate business tax return, but rather on your own personal return. The money “passes through” the business to you, so you are not subject to the double taxation structure that often applies to corporations.

To form an LLC, you’ll have to prepare and file the Articles of Organization with your state of formation. You’ll also need to designate a registered agent to receive and forward your important legal documents and comply with ongoing requirements like filing annual reports.

Why Should I Form an LLC?

Many businesses are able to survive and thrive for years using the sole proprietorship or partnership structures, but the growth of a business may eventually outpace the capabilities of those business types. An LLC can offer more room for business growth and development for a variety of reasons.

Operating your business as an LLC makes it easier to secure business bank accounts, hire employees, and protect your personal liability. Because an LLC is a separate legal entity from its owner or owners, it will also be able to survive changes in structure and ownership in ways that don’t apply to sole proprietorships and partnerships that are not distinct from their owners. Attracting investors can also be easier for an LLC since investing in a company is more attractive and less risky than investing in an individual.

At a more basic level, owning an LLC can enhance the credibility of your business. It will be easier to build a distinct and recognizable brand as an LLC, increasing your legitimacy in the market and making you more appealing to prospective customers.

Finally, forming an LLC significantly reduces risks to your personal assets should your business ever face a lawsuit. If you operate a business that runs the risk of legal action for any reason, forming an LLC is a good way to protect yourself.

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Why Wouldn’t I Form an LLC?

Even though the limited liability company has quite a few advantages as a business type, it’s not always the right option for everyone. For those who operate very small businesses with little risk of legal issues, the simplicity of a sole proprietorship or partnership may be the best option.

When running a one- or two-person small business that does not require personal asset protection or brand recognition to survive, it may not be worth the time and money it takes to file paperwork and pay formation and annual fees to maintain an LLC. Sole proprietorships and partnerships do not require state recognition to operate and there is no reason to keep business and personal assets separate. If you are the only member of your business this can keep things much more simple and manageable.

Similarly, you may have started your business small with plans to grow in the future. Operating a sole proprietorship early on can give you the time and resources needed during the early planning stages. You will always be able to make the decision to form an LLC in the future as your business needs evolve.

How Do I Form an LLC?

If you determine that an LLC is the right business type for you, there are two routes you can take to get things started.

Some choose to prepare and file the Articles of Organization on their own, while others opt to hire a professional LLC formation service to file on their behalf. While hiring a service will add to the cost of formation, it can save you time and prevent mistakes. Most companies also offer registered agents services as part of the package.

Some of the best LLC formation companies around today include:

  • Incfile: $49 - At only a slightly higher price point, Incfile offers the benefits of a larger, industry leading company and a full year of registered agent service.
  • ZenBusiness: $49 - ZenBusiness is an excellent option because of their high-quality services for small business at an affordable price.

Wrapping Up

Whether or not the limited liability company is the right business structure for you largely depends on the unique needs of your company and its growth potential. If you want to hire employees, open business bank accounts, or enjoy the benefits of personal asset protection, an LLC may be right for you.

However, not all businesses need to go through the process and expense of forming an LLC, and can continue operating just fine as a sole proprietorship or partnership. If you are a self-employed or freelance worker with no intention of expanding beyond your one-person operation, forming an LLC is generally not necessary.

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