Navigating Startup Legality: How Entrepreneurs Kickstart Ventures with LLC Formation

Launching a new business venture can be incredibly exciting. It’s also fairly risky. Startup companies expose you to litigation and loss, making it necessary to implement some legal safeguards.

One of the best ways to do that is by choosing the right legal framework for your business. There’s no one right answer, but for a majority of startup entrepreneurs, the ideal option is to register the business as a Limited Liability Company, or LLC.

Simply put, the LLC structure offers the types of legal protections that startups need, but with less administrative overhead than a corporation. But what exactly is an LLC? And how does it help startup entrepreneurs mitigate their business risk?

Sole Proprietorships, LLCs, and Beyond

To understand what makes the LLC so advantageous, it’s helpful to compare it with some of the other legal options.

For instance, when you begin generating income on the basis of self-employed activity, the government will automatically classify you as a Sole Proprietor. This basically means you are your business, with no legal distinction between the two entities. Your business and personal assets are one and the same, and likewise with your liabilities.

You could also bring a business partner on board, establishing your company as a legal Partnership. Partnerships work the same way as Sole Proprietorships, with the added wrinkle that you split assets and liabilities between each partner.

Still another option is to register your startup as an LLC. This establishes the company as its own legal entity, unique from its owner. As such, you can keep your business assets and liabilities separate from your personal ones. 

One final option is to incorporate… but Corporations come with some fairly rigid regulatory standards. For example, with a Corporation, you’ll be required to file extensive annual reports, to hold regular shareholder meetings, and to abide by certain guidelines for how the business is structured. There is nothing wrong with any of this, but for many newer and smaller companies, these requirements may be far too burdensome.

Choosing the LLC Format

As such, a majority of startup entrepreneurs choose the LLC format. Doing so yields a number of advantages, including some important legal protections. Benefits of the LLC format include:

Personal Wealth Protections

Startups are often prime targets for litigation, making it important to put some legal shields in place. Registering as an LLC allows you to do exactly that. Because your assets and liabilities can be kept distinct, you can ensure your personal assets (like a family bank account or investment portfolio) are off the table to potential lawsuits. This allows you to invest in the business more confidently, knowing that your personal wealth is fairly secure.

Increased Credibility

One of the hardest parts of launching a startup is convincing potential lenders, partners, and investors that you’re worth betting on. Registering your company as an LLC helps. That’s because the LLC formation process helps you assert your credibility, demonstrating that your business is not just a side hustle or a vanity project.

Tax Flexibility

When you’re just getting started with a new business venture, the ability to adapt and to be flexible is crucial. LLCs have a lot of flexibility baked in, including flexibility with respect to taxation. You can choose tax-through or corporate taxation, simply depending on what you perceive to be most advantageous.

Administrative Ease

Finally, note that establishing and operating an LLC is comparatively simple. (More on that in just a moment.) For entrepreneurs who would rather focus on strategy and vision than legalities, the LLC format is a fairly low-maintenance option.

Registering an LLC

There are a few simple steps involved with LLC formation.

Choose the State Where You Will Register

Technically, you can register anywhere. Financially, the best bet is typically to register in the state where you are headquartered, where you conduct your business, and where you make money. So, if you’re located in Delaware, you should likely be forming your LLC in Delaware. Delaware is one of the best states to form an LLC. More than half of publicly traded corporations in the U.S. and 60% of Fortune 500 companies are incorporated in Delaware.

Exceptions? If you’re not in the US and don’t have a home state, then you can take your pick! And if you’re starting a company to handle real estate transactions, you’ll want to register your LLC wherever you’re investing in properties.

Select a Name and Registered Agent

Your LLC must have a name that isn’t already in use by another LLC in the same state.

You must also have a Registered Agent, which may be either an individual or an organisation tasked with receiving legal correspondence on your business’ behalf. Some states will allow you to serve as your own Agent, but it’s more common (and usually very inexpensive) to outsource this duty to a third-party service.

File Your Paperwork

There are a couple of documents needed for LLC formation. First, create an Operating Agreement, simply outlining the internal structure of your business. Second, you’ll need Articles of Organisation. This latter document you’ll file with the state, officially establishing your LLC.

Note: Filing for an LLC does include a small cost, which may be anywhere from $20 to $300, depending on the state you’re in.

Get Your Finances Set Up

Finally, note a couple of important steps to ensure you’re financially positioned for a successful LLC.

First, set up a business bank account, which should be separate from personal checking and savings accounts.

Second, claim an Employer Identification Number, or EIN, from the IRS. This is an essential asset for filing taxes or handling payroll.