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Incorporating your startup is a big step. How you approach this process will have big ramifications for your organization. Many startup founders choose to turn their business into an LLC. This can be a good option for small organizations because of the flexibility this approach provides. But is a startup LLC the best approach for you? Let’s find out.
Benefits Of An LLC
There are plenty of reasons why registering your startup as an LLC makes sense. First, you will get legal protections. You can separate your personal assets from the business. This means that you won’t be held liable for any business debt. Even better, there isn’t a legal obligation to disclose your business’s financial statements to the public.
That’s not all. You get flexible taxing options. This gives you options to minimize the amount that you are paying. Most of the time, the profit is passed through to the members of the LLC. They then pay personal income taxes on the amount they earn. This limits the amount of tax the business needs to pay.
Even better, an LLC is easy to run. There’s no need to have any annual meetings. There is more flexibility in how you structure the business. LLCs don’t have shareholders, they have members. These can be individuals, or they can be other LLCs and corporations. Starting and running an LLC is fairly simple. There isn’t much paperwork and the fees are relatively low.
Downsides Of An LLC
But LLCs aren’t perfect. Before you start a startup LLC, you should be aware of a few potential issues. While running an LLC is easier than other corporation types, there is still paperwork to complete. This will be a greater burden than the sole proprietorship and partnerships that many startup founders use initially.
Likewise, while your tax obligations might be flexible, you can’t avoid business taxes entirely. Many states will tax the net income of an LLC. You will also need to pay fees to register the organization.
Another issue you might run into is assigning ownership of an LLC. In a corporation, you will be able to grant shares. Many investors prefer this approach. If the business is doing well, they can sell their shares and take the profit. LLCs still allow you to transfer ownership from one person to another. But the process isn’t as smooth and straightforward.
LLCs have more flexibility in the way that their profits are distributed. The members get to decide who gets what. For smaller organizations, this might be a good arrangement. But as your company grows, you’ll need to take on more investors. Because of this, it might be easier to switch to a corporation. This gives you set rules for determining how the profits are split.
Converting An LLC To A Corporation
As your business grows, you want to change the way you’ve registered the organization. Many founders initially use a startup LLC before transitioning into a corporation. Deciding the right time to make this conversion can be tricky. Typically, this occurs when a business is ready to attract investors and wants to issue shares. Or the organization has outgrown the LLC and wants the more structured management approach of a corporation.
Just make sure that you are equipped to deal with the higher workload required with running a corporation. It’s also a good idea to talk to your accountant about the taxes your corporation will face. Like an LLC, corporations have some flexibility in how they are taxed.
There are a few ways to convert your startup LLC to a corporation. First, you can use a statutory conversion. This is the fastest and easiest. All you need to do is fill out the appropriate forms. Submit them to the state secretary. However, not all states will have this feature. If you want, you can also use this approach to move your corporation to a different state. Many businesses choose to transfer to a new state that offers lower taxes.
If you can’t use a statutory conversion, try a statutory merger. In this case, you’ll create a new company. Get your members to vote and agree to the merger. The membership rights are transferred into shares. You’ll then need to fill out the forms and submit them.
The most difficult option is to use a non-statutory conversion. In this case, you’re essentially starting over. The old LLC will be dissolved. You’ll take all the assets and put them into your new corporation. Given how expensive and time-consuming this process is, it’s rare for any startup to choose this option.
Conclusion
Deciding the registration for your company is important. Getting this aspect right will set you up for future success. Many small businesses start as LLCs. However, this approach might not be right for you. If you want, you can skip straight to being a corporation. Take the time to weigh your options before deciding which approach you want to pursue.
