A Guide to Business Structures: What is an LLC, How to Form an LLC, & More
This month, we interviewed on-call Rocket Lawyer Attorney Michael Fucci to provide helpful insights on the most popular business legal structures for small business owners, what incorporation means, and the potential benefits of forming an LLC or corporation for your business.
Watch the full video, and enjoy a quick read up on the most frequently asked questions about legal business structure types below.
A Quick Guide to Incorporation, LLCs, & S Corps
What is incorporation?
Incorporation is the act of legally separating yourself from your business so that you have less personal liability for your company's debts, losses, and liabilities, while still maintaining ownership of your business. The term literally means 'forming a corporation,' but is also sometimes used loosely to describe forming a company that isn't a corporation, like an LLC (Limited Liability Company).
What is an LLC?
An LLC (or 'Limited Liability Company') is generally thought of as a hybrid between a sole proprietorship and a corporation. Unlike a sole proprietorship, operating your business as an LLC can help protect your personal assets (e.g. your house, car, personal funds, etc.) if your business ever faces legal action. But a corporation is owned by its shareholders, and an LLC is usually owned by one owner, called a 'single member.'
Is an LLC incorporated?
Yes and no. It's 'incorporated' in the sense that when you own an LLC, it can help protect you from being personally liable for your LLC's debts, losses, and liabilities. But it's not incorporated in the sense that 'incorporated' means you've formed a corporation, and an LLC technically isn't a corporation.
What are the main business structure types?
- Sole proprietorship
- Limited Partnership
- LLC (Limited Liability Company)
- LLP (Limited Liability Partnership)
What are the benefits of LLCs?
- Helps protect your personal assets (what's called 'limited liability protection')
- May provide flexible tax benefits because it allows for pass-through taxation
- Generally requires less paperwork than a corporation
- May make it easier to get a business bank account, since many business bank accounts require that your business is an LLC or corporation
- May make it easier to build business credit
- Has a flexible company structure
- May make it easier to get a loan
- Your company may be seen as more 'legitimate' than if you were a sole proprietor
- Can have one owner, or an unlimited amount of co-owners (called ‘members’)
- Can exist perpetually, regardless of whether another member leaves or sells their part of the company
- Can later be restructured to form a corporation
What is an S Corp?
An S-Corp (Small Business Corporation) is a tax filing status. As an S Corp, your company’s income will be taxed as your personal income, as with an LLC or sole proprietorship. To qualify for S Corp status, a company must have less than 100 shareholders, and each shareholder must be a US citizen. Filing as an S Corp may be a good choice for businesses who are expecting to expand more rapidly, but who also anticipate having less than 100 shareholders in the foreseeable future.
Benefits of S Corps
- Provides limited liability protection
- Allows for pass through taxation
- Generally more attractive to investors than an LLC
- Can issue stocks to shareholders (like employees and investors)
- Can open a business cash account or credit card
- Can build business credit
- Can exist perpetually, regardless of whether a shareholder leaves or sells their part of the company
Learn more about S-Corps here.
How to Form an LLC
Below is a general overview of steps for forming an LLC:
- Choose the state where you want to operate your business
- Choose a unique name for your LLC
- Select a Registered Agent to represent your LLC
- Decide upon a management structure for your LLC
- Create an LLC Operating Agreement (if required by your state)
- Create an EIN (Employer Identification Number)
- Ensure you're legally allowed to do business in other states by filing to do business there
For help forming an LLC or corporation, visit Rocket Lawyer.