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February, 2022
Misconceptions-About-Forming-an-LLC

7 Misconceptions About Forming an LLC You Need To Know About!

If you want to protect your business, you might be thinking about creating LLC in New York State. While this might be a smart business strategy, you should work with professionals who can help you properly form an LLC. There are a lot of misconceptions people have about an LLC. It is best to understand these going in so that your company is in the best position possible to be successful. Take a look at some important information and make sure you reach out to professionals who can help you form your LLC properly.

What Is an LLC?

An LLC is a limited liability company. This is one of the numerous types of legal entities that businesses can form. LLCs have become popular among businesses of all sizes because they limit the liability of the company, but are less expensive to form than corporations. Furthermore, an LLC is frequently less complicated to operate when compared to a corporation. An LLC can be used to operate a business of just about any size. Some LLCs have one owner while other businesses have multiple owners.

Each state has its own regulations regarding LLCs, so it is important for business owners to be familiar with how their state forms LLCs. What are a few of the most common misconceptions people have about LLCs?

1. LLCs Are the Same Everywhere

One of the most common misconceptions people have about LLCs is that they are the same nationwide. In reality, this is not the case. Filing requirements for LLCs can vary from state to state even though many of the documents request similar information. For example, New York State requires new LLCs to follow a publishing requirement, where they announce the formation of the company in the newspaper.

Furthermore, the filing fees can also vary from state to state. Even though the limited liability protection afforded to an LLC is typically similar from place to place, it is not identical. That is why it is important for new LLCs to work with a professional that can streamline the formation process.

2. LLCs Are Like Corporations

An LLC and a corporation are very different things. Typically, an LLC is created under state law. Therefore, the process of forming an LLC depends on its location. The IRS does not view an LLC as a separate entity for tax purposes, which opens up greater degrees of flexibility for the owners. The members of the LLC can choose how they want to be taxed.

There are two separate types of corporations. The first is an S corporation and the second is a C corporation. An S corporation is similar to an LLC in that it is a pass-through entity. The owners are taxed paste on the profits and losses of the corporation. The C corporation is taxed at the highest business level via a corporate income tax. This means the corporation is taxed separately from the owners and members.

In general, an S corporation passes any potential profits and losses down to its shareholders, while a C corporation is responsible for its own profits and losses. Therefore, an LLC provides more flexibility than a corporation, but an S corporation is more similar to an LLC than a C corporation.

3. LLCs Are Only for Small Businesses

Many people believe that LLCs are only for small businesses. It is true that LLCs are common among small-business owners, but they can be used by businesses of just about any size. For example, did you know that one of the biggest companies in the world, Amazon, uses LLCs for a number of its subsidiaries? Even though Amazon itself is a corporation, its subsidiaries are generally organized as LLCs.

By forming its subsidiaries as LLCs, Amazon itself reduces the legal liability it faces because it might not be as vulnerable if a lawsuit is filed against one of its subsidiaries, which are organized as separate LLCs in different states.

Clearly, this is an indication that a large company can also operate as an LLC. If you are a small business, an LLC may benefit you; however, even if you have a large company, forming an LLC can still be beneficial.

4. LLCs Are Taxed Less Than Sole Proprietorships

Another common misconception people have is that LLCs are taxed less than sole proprietorships. This is not the case. When it comes to federal tax, a sole proprietor who runs his or her own business is taxed based on the profits and losses of his or her business. An LLC with a single member (the same number of members as a sole proprietorship) is considered a disregarded entity by the IRS. This means that a single-member LLC is taxed the same way a sole proprietorship is.

There are tax deductions and credits that both LLCs and sole proprietorships can claim. For example, they might qualify for the path reduction created by the Tax Cuts and Jobs Act back in 2018. Ultimately, the most important thing for LLCs and sole proprietorships to remember is that they are taxed similarly. Anyone who has questions or concerns about taxes for LLCs or sole proprietorships should reach out to a tax professional who can help them.

5. Forming an LLC Frees the Owner of Personal Liability

Many people believe that forming an LLC can shield the owner of that LLC from personal liability. It is true that an LLC is a limited liability company, and it may provide some protection; however, this doesn’t mean the owner is completely absolved of all personal liability.

There are situations where the veil of an LLC may fall apart. Examples include:

  • The court system, or a plaintiff filing a lawsuit against the LLC, can prove that the LLC is simply an extension of the owner instead of a completely separate entity, leaving the owner vulnerable to judgment.
  • A plaintiff could seek to prove that the LLC has been used in a fraudulent manner. Then, the protections afforded to a typical LLC might no longer apply.
  • Creditors might seek to claim that they have been unjustly damaged by the protections of the LLC. This could open the owners up to additional liability.

If the court system or a plaintiff can prove any of these criteria, then the owners may lose their limited liability protection. This means that a lawsuit could pursue personal finances, cars, houses, and other property.

6. Small Businesses Should Wait Before Forming an LLC

There are a lot of small business owners who believe it is better to wait before forming an LLC. They may think it is expensive, or they may think they need to have a certain amount of financial capital before they can qualify. In reality, this is not the case. Forming an LLC is a popular decision among small-business owners, and it affords a wide variety of protections. One of the biggest benefits of forming an LLC is that it can shield the owners and members from a certain amount of liability in certain situations.

Forming an LLC provides a significant amount of flexibility. In some situations, the owners and members are responsible for managing the LLC, controlling the daily business operations. Or, the business can hire professional managers, who can manage the day-to-day operations of the company. This is particularly helpful if the owners want to work with consultants who are more experienced in running a business.

Forming an LLC is also relatively straightforward. The paperwork and fees for forming an LLC are typically light, so small business owners can form an LLC relatively quickly. To expedite this process, it is a good idea to work with professionals who can make sure the steps are completed properly.

7. Forming an LLC Is Complicated

Finally, a lot of business owners believe that forming an LLC is complicated. Fortunately, this is not always the case. In most states, you need to fill out a document called the Articles of Organization. The exact nature of this document can vary from state to state; however, a lot of them require the same information. You need to have a registered agent, the names of the members or owners, and the physical location of the business. You will also need to make sure the business name you want to use is still available in your state.

Then, if you have to pay a filing fee. It is usually a few hundred dollars, but it varies from state to state. Fortunately, if you are concerned about the process of forming an LLC, you can work with a professional team that can streamline the process for you. That is where Windsor Corporate Services can be of assistance.

Why Choose Windsorcorporateservices.com?

Even though there are a lot of misconceptions people have about forming an LLC, the formation process is popular among business owners of all sizes. It is important for you to protect your business from liability, and forming an LLC can help you do that. If you are creating LLC in New York State, it would be our pleasure to help you.

At Windsor Corporate Services, we have a tremendous amount of experience helping businesses of all industries form LLCs. We can walk you through the process, addressing all of your questions and concerns while streamlining the steps on your behalf. If you would like to create your LLC as quickly as possible, count on our experienced team to guide the way. Contact us today to learn more about forming an LLC in New York state!

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