3 Questions to Ask Before Forming an LLC

Two businessmen discussing their options about forming an LLC

Whether launching an online store, offering a service, or expanding your existing business, forming a limited liability company (LLC) is one of the best ways to protect yourself from financial and legal risks. An LLC provides its owners certain benefits like pass-through taxation and personal asset protection. But, before creating one, it's important to answer three critical questions.

1. Where Should I Create My LLC?

It's recommended that a business owner create an LLC in the state where the business will operate for several reasons. Establishing your LLC in its operating state ensures you comply with that state's specific business formation and tax laws. It also makes it more convenient to obtain necessary state licenses and permits and to register your business for state and local taxes. Operating in your LLC's home state may also provide other benefits, such as in-state discounts or networking opportunities.

2. How Will My LLC Be Managed?

An LLC offers business owners flexibility in how their company is governed. The most common approaches are:

  • Managing Members: The owners (called members) also oversee the business and make decisions. This is a simple and inexpensive option for small LLCs with just a few owners.
  • Board of Directors: The members elect a board of directors to manage the LLC. This suits mid-sized or larger LLCs, especially if the members want less day-to-day involvement.
  • Operating Agreement: The members create an operating agreement outlining decision-making processes, profit distribution, and other essential operations. This customized agreement allows for tailored management and oversight of the LLC.

3. Should My LLC Have Investors?

Whether an LLC should have investors depends on the business owner's goals and risk tolerance. Accepting investment capital can help an LLC grow more quickly by providing an influx of cash to hire more staff, scale operations, and market to new customers. However, bringing on investors also means sharing ownership and control of the company and being accountable to others.

For business owners who want to retain complete control of their LLC or operate in a risky industry, it may be better to self-fund the company's growth. Ultimately, the decision is personal and should align with the LLC's vision and the owner's willingness to share the business's responsibility. If pursuing investment is appealing, it's critical to have clear terms outlined in advance regarding ownership stakes, profit sharing, and other vital details.

How a Business Lawyer Can Help Forming an LLC

Forming an LLC requires careful adherence to local regulations and laws. Engaging a business lawyer to help establish your LLC is critical to ensuring the proper formation of your business and avoiding costly mistakes or legal issues.

The team at Purdy & Bailey, LLP can help you select the optimal state in which to register your LLC, prepare and file the necessary formation documents, and establish an operating agreement that outlines the ownership, structure, and rules of your new business. With our experienced attorneys' guidance, forming an LLC does not have to be a daunting process, allowing you to launch your business with confidence that you are on a sound legal footing.

Contact our experienced business litigation attorneys at Purdy & Bailey, LLP online or by phone for guidance with your LLC. (858) 360-7080

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