The 5 Best Questions to Ask Before Starting an LLC
Last Updated: By TRUiC Team
A limited liability company (LLC) is a formal legal business structure with a lot of potential perks, like:
- Personal asset protection
- Tax benefits
- Extra credibility
However, there are still a few things you need to think about before starting an LLC.
In this guide, we will walk you through the five best questions to ask before starting an LLC to ensure your startup starts off on the right foot.
Recommended: Ready to form your LLC? Get started with our step-by-step guide on How to Form an LLC.
Questions to Ask Before Starting an LLC
To help you prepare to form an LLC, we’ve broken down the five questions you need to ask yourself:
- Will I benefit from an LLC?
- Which state will I form my LLC in?
- What will I name my LLC?
- Who will form my LLC?
- Do I need investors?
Will you benefit from an LLC?
You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.
By starting an LLC for your business, you can:
- Protect your savings, car, and house with limited liability protection
- Have more tax benefits and options
- Increase your business’s credibility
Limited Liability Protection
LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.
An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.
To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.
LLC Tax Benefits
LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.
The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.
Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.
S Corp Option for LLCs
The S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).
S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.
The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.
In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2000 a year on taxes.
We estimate that if a business owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.
You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.
For questions about tax solutions for your [BI business], we recommend scheduling a free tax consultation.
Credibility and Consumer Trust
Businesses rely on consumer trust. Credibility plays a key role in creating and maintaining any business.
Businesses gain consumer trust simply by forming an LLC.
A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.
Which State Will I Form My LLC In?
There are several reasons to ponder which state you will form your LLC in. From lower tax rates to the cost of LLC filing fees, it is no secret that some states are more pro-business than others. It is important to note that unless you’re planning to relocate, the best state to form an LLC in is your home state to avoid additional fees and complications.
However, if you are a foreign person or real estate investor that is considering starting your LLC in another state, the best states to form your LLC in based on low state taxes, filing fees, or minimal reporting obligations are Delaware, Nevada, and Wyoming.
Alternatively, the states that are the least LLC-friendly due to high tax rates or exorbitant filing fees are California, New York, and Iowa. However, this does not mean you shouldn’t form your LLC in these states; it just means that you may need to budget a little extra for formation and maintenance costs.
What Will I Name My LLC?
The name you choose for your startup is representative of your brand and, ideally, will attract customers to your business. Before you choose a name, there are a few things you'll need to consider first, such as your state’s LLC name requirements and whether the name is available in your state.
LLC naming requirements vary depending on the state. These are a few general rules you can expect to encounter:
- Your business name must include “limited liability company,” “LLC,” or an equivalent abbreviation (e.g., L.L.C., etc.).
- Your business name must be unique to your state.
- Your business name cannot include the terms “bank,” “trust,” or include terms that imply it is associated with a government agency.
You can check name availability by doing an LLC name search in your state. If your name is available, the next step is to confirm that the matching domain name is available too.
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For help naming your LLC, check out our free Business Name Generator as well as our guides on How to Name a Business.
Who Will Form My LLC?
When you’re ready to officially form your LLC, you’ll need to decide whether you’ll form the LLC yourself or pay a small fee to have an LLC formation service do it for you.
Since LLCs are the easiest formal business structure to start and maintain, you can form your LLC yourself. If you think forming an LLC yourself is the right choice, check out our free guides to learn how to start an LLC in every state.
Using a service to form your LLC will save you time and energy. Additionally, some LLC services offer free registered agent service in conjunction with their LLC formation services.
Do I Need Investors?
If your business requires capital from outside investors, then an LLC isn’t for you. Reason being, one of the biggest differences between LLCs vs Corporations is the ability to take on investors. Startups that require investors should start a corporation.
There are several ways to generate funding for a startup, including small business loans, grants, and bootstrapping. For startups, however, taking on investors might be the way to go. There are typically two types of investors that choose to invest in startups: venture capitalists and angel investors.
Both of these investor types seek investment opportunities that have the potential to yield a high return on investment (ROI) and therefore are an ideal fit for startups that anticipate rapid growth. In addition to a high ROI, investors may request a more active role in your startup’s operations.
Frequently Asked Questions
Should I get an LLC for my business?
Choosing a limited liability company as your business structure offers many advantages to startups, including tax benefits and personal liability protection. Additionally, LLCs are the easiest formal business structure to start and maintain.
Generally speaking, the benefits of forming an LLC far outweigh the hassle or cost of setting it up and will continue to be advantageous for your business in the long run. For more information, visit our guide on choosing the right business structure for your startup.
What do I need to know before forming an LLC?
Before you can file your formation documents with your state and officially form an LLC, there are a few things you need to know:
- The name of your company and whether it is available
- Whether your LLC will be member-managed or manager-managed
- The state requirements for filing formation documents where you are located
Each state’s requirements to form an LLC will vary, and it is important that you are aware of all of the requirements to avoid your filing being rejected.
For a step-by-step guide to forming an LLC in your state, visit our How to Form an LLC guide and select your state to get started.
What is the downside to an LLC?
The main disadvantage of forming an LLC is that your business won’t be able to attract outside investors. Alternatively, if you choose to form a corporation, you are able to take on investors such as venture capitalists or angel investors — one of the biggest differences between an LLC vs Corporation.
How do you pay yourself from your LLC?
The way you pay yourself from an LLC depends on how your business is taxed. If your business is a single-member or multi-member LLC, you can pay yourself in one of two ways: through a reasonable salary and distribution as an S corporation, or through a distribution that passes through your individual tax return.
Though it is most common for LLC owners to pay themselves through a distribution that passes through their individual tax returns, LLCs with higher profits (enough to pay members a reasonable salary plus at least $10,000 in annual distributions) may elect to be taxed as an S Corp.
Am I self employed if I own an LLC?
As the owner of an LLC, you are considered self-employed rather than being employed by your LLC, unless you elect S corp tax status. For tax purposes, this means that rather than paying a withholding tax you are responsible for paying taxes on your profits from the business. Learn more about how your LLC is taxed with our full LLC tax guide.
What must be filed to form an LLC?
Generally, you must file formation documents to form an LLC, such as a Certificate of Formation or Articles of Organization, with the state you’re located in. In addition to this, your state may have additional filing requirements such as name reservation, cover letter, or initial report that you will need to file as well.
Find out the requirements to form an LLC in your state by visiting our How to Form an LLC guide and selecting your state.
How can I lower my LLC taxes?
There are a few ways you can legally reduce your LLC’s tax liability:\
- Know your tax-deductible business expenses and write them off
- Elect S corp status
- Contribute to a 401k under the S corp tax status as an LLC
For more information about taxes and your LLC, read our LLC tax guide here.
Can I set up an LLC on my own?
You can form an LLC on your own by submitting completed formation documents to your state as well as fulfilling any additional requirements your state may have. In fact, starting an LLC on your own is easy with the help of our state-by-state LLC guides. Simply visit our How to Form an LLC guide, select your state, and get started!
What do I need to know before forming an LLC?
Here are the top things you need to know before forming your LLC:
- The name of your LLC
- Whether your LLC will be member-managed or manager-managed
- The state you plan to form your LLC in
- If you will form your LLC yourself or hire an LLC formation service
- Who your registered agent will be
- Whether you’ll need investors
Who to talk to about forming an LLC?
The best resources for your LLC-related questions are state-level government agencies that typically boast a plethora of resources to help entrepreneurs form their business either online or in person. Additionally, an LLC formation service can help by answering questions you may have as well as filing your formation documents.
For step-by-step guides to forming an LLC, visit our How to Form an LLC guide and select your state.
Should I get an LLC for my small business?
Generally speaking, we recommend LLCs as a business structure for most small businesses. LLCs not only offer tax benefits and flexibility, but also personal liability protection which keeps your assets protected unlike informal business structures such as sole proprietorships.
Read more about the benefits of starting an LLC.