You probably know the old saying: You have to spend money to make money. While that’s undoubtedly true, it’s also true that smart entrepreneurs seek strategic ways to keep their costs under control. Cost-cutting is an important way to maintain adequate cash flow, and to keep profit margins robust.
There are plenty of ways for companies to curb costs, some of which often go overlooked. A perfect example: Choosing the right legal structure for your business. Specifically, registering your company as an LLC can be an important way to contain operational costs.
What is an LLC?
LLC stands for Limited Liability Company. This is one of the most popular structures for businesses, and is in wide use across virtually every industry.
The most important thing to know about an LLC is that, when you register one, you create a new legal entity. Unlike Sole Proprietorships, which do not distinguish between the business and its owners, an LLC will allow you to keep your personal assets separate from your business ones. Along the same lines, you can keep personal and business liabilities distinct.
This opens up a number of benefits, including some unique ways to keep your business costs under control.
How Do LLCs Help You Cut Costs?
Consider just a few of the ways in which registering your business as an LLC can help you decrease your costs:
— LLCs confer professional credibility on your company, making it much easier to secure advantageous rates on loans and investments.
— An LLC offers personal wealth protection, allowing you to invest in your business without fear that a lawsuit will take everything away from you.
— LLCs offer a lot of administrative flexibility, allowing you to run your company without having to worry about costly administrative burdens.
What About Taxes?
There are also some financial implications with regard to how you file taxes.
When you register your business as an LLC, you are automatically classified as a pass-through entity. Basically, this means you declare profits or losses on your personal tax return. You then pay at your normal tax rate.
You can also choose, at any time, to opt into corporate taxation, if that makes more financial sense for you. Your accountant or tax professional can let you know if and when this move makes sense.
This built-in flexibility provides LLC owners with significant financial wiggle room.
Is It Expensive to Register an LLC?
Something else to keep in mind: Registering an LLC is usually pretty inexpensive.
Here it’s important to acknowledge that the requirements for LLC formation vary a little from state to state. So, forming an LLC in Florida may look different than forming one in Wyoming.
With that said, the process is usually quite simple, and typically does not require you to hire a lawyer. You will need to pay your state’s filing fee, and depending on the state you’re in, that could be anywhere from $15 to $300 on an annual basis.
Compared with the administrative expenses required to incorporate, registering an LLC is a fairly low-cost option.
What Else is Required to Form an LLC?
Again, the specific steps can vary from one state to the next, but a general trajectory for LLC formation looks a little bit like this.
— Choose a name for your LLC. You should always pick a name that makes sense from a marketing and branding perspective, but for LLCs there is also a legal requirement: You need a name that’s not in use by any other LLC in your state.
— Select someone to be your Registered Agent. Your Agent is responsible for receiving tax documents and other legal correspondence on behalf of your company. You can select an individual or an institution to fill this role.
— Create an Operating Agreement. Think of this as a charter, outlining how your business is managed day-to-day. This document can help you sidestep legal conflicts down the road.
— File Articles of Organization. This is the document you file with your state, formally creating your LLC. This is the part where that LLC registration comes into play, as well.
These are the basic steps required for getting your LLC up and running.
Are There Any Other Expenses Associated with Forming an LLC?
As you consider the expenditures associated with LLC formation, the registration fee is the main concern. However, there are a couple of other costs that are worth keeping in mind.
— In many states, you are not allowed to serve as your own Registered Agent. This means you’ll need to hire a third-party service. This is usually an annual expense of somewhere between $100 and $200, though costs can vary.
— If you’re in California, you’ll also need to worry about the flat-rate LLC tax, which is currently set to $800.
Are There Other Financial Considerations When Registering an LLC?
When registering your LLC, there are a couple of additional financial steps you’ll want to consider.
— Make sure you open a business bank account. In the interest of keeping your business finances separate from your personal ones, create a bank account that’s separate from any personal ones.
— Also take the time to claim an Employer Identification Number (EIN) from the IRS. You’ll need this identifying number before you can process payroll or file your business taxes.
For Containing Costs, LLCs are Invaluable
As you seek different ways to run your business affordably and efficiently, don’t overlook the importance of choosing the right legal structure. For a majority of small and medium-sized businesses, that means registering an LLC.
