Starting a business is a lot like entering into a marriage contract. You anticipate great profits and happiness on the horizon, but as any lawyer will tell you, you need to protect yourself against getting dashed against the rocks of love or business.
When it comes to committing yourself to a fully-fledged business in the US, you may want to register your business as a legal entity in order to be able to trade with other formal businesses.
For small businesses in the US, one of the most important concerns is ensuring business owners have limited liability in terms of their business’ operations. Known as a limited liability company (LLC), it limits the owner’s liability for the operations of the company, while offering the management team flexibility and significant tax benefits that can play a crucial role in the survival of the small business, particularly during the first few years of existence.
However, this doesn’t mean that the business can be run unscrupulously or that owners can disappear with their ill-gotten gains. In the event of the business closing, creditors can only attach the assets of the company itself, and would generally have no right of attachment to the personal assets of the business owners, unless it can be proven that the owners committed a felony.
On a more positive note, the structure and workings of an LLC ensure that growth or expansion of the business is not restricted in any way, with LLCs ranging from small businesses to large organisations employing hundreds of people.
It’s important to note that an LLC will be taxed according to the prevailing tax legislation of the country in which the LLC was registered. The LLC allows for pass-through taxation, as its income is not taxed at the entity level; however, a tax return for the LLC must be completed if the LLC has more than one owner. Any LLC income or loss as shown on this return is passed through to the owners. The owners, also called members, must then report the income or loss on their personal tax returns and pay any necessary tax.
Members of an LLC can be private individuals, partnerships, trusts or even corporations, and there is no limit to the number of members a LLC can have. This affords the entity enormous flexibility in terms of bringing in skilled individuals and investors as partners in the business, along with the ability to choose a management structure composed of either all the members or an elected management group.
On the negative side, a LLC usually costs more to form and maintain than a sole proprietorship or general partnership. Many states charge an initial formation fee and may also impose ongoing fees, such as annual report and/or franchise tax fees. Transferring or amending the ownership structure also presents a number of speed bumps for the business owner to navigate.
Nonetheless, a LLC remains an extremely positive option for single owner businesses, as it can scale up without needing to re-register as a new business entity, while also at the same time not being subject to some of the more strenuous rules that large corporations are governed by across the US.