By Mabel Alarcon Craven, small business consultant. Jessie Eby contributed to this article.
Many small businesses start as bootstrapped, one-person operations: just you, your idea, and a whole lot of hustle.
But as your business grows, so do your responsibilities and risks. You might begin taking on bigger projects, handling more income, or working with contractors and vendors. Once you reach this point, it may be time to consider formalizing your business, and forming a limited liability company, or LLC, is one of the most popular ways to do it. An LLC offers flexibility, protects your personal assets, and gives your business a more official standing in the eyes of banks, customers, and potential partners.
What are the most common business structures?
Sole proprietorships, partnerships, LLCs, C corporations, and S corporations are the most common business structures.
Sole proprietorships and partnerships are simple business structures that don’t offer liability protection. While the business owners are entitled to all profits, they are also on the hook for all of the business’ debts, losses, and liabilities. These business structures utilize pass-through taxation, meaning all taxable income, losses, deductions, and credits are passed through to the owner’s personal tax returns.
S corporations and C corporations both provide limited liability protection but have different compliance standards and tax implications. While S corporations utilize pass-through taxation, C corporations are taxed first as the corporation itself at the federal corporate tax rate, and then any dividends or profits received by shareholders are taxed a second time as personal income.
An LLC combines the simplicity of sole proprietorships and partnerships with similar protection of a corporation, making it a popular choice among small business owners.
What is an LLC?
An LLC is the most common business structure among business owners with fewer than 10 employees. As its name suggests, an LLC offers liability protection, meaning the business owner’s assets (things like their home, vehicle, and personal bank accounts) are usually protected from the business’ debts and liabilities. The LLC is considered a separate legal entity from the business owner.
What are the benefits of operating under an LLC?
In addition to the liability protection it provides, an LLC is easy to operate. This structure allows flexibility in taxation and management, can have unlimited members (owners), and doesn’t require a board of directors. Additionally, an LLC’s members are not required to be U.S. citizens or residents.
At what point should you consider forming an LLC?
Consider forming your LLC when your business moves out of the hobby or idea-testing stages and you begin to get more serious. Formalizing your business can feel like a big step, and it may be tempting to put it off in favor of continuing to operate as a sole proprietor. Don’t wait too long—setting up your LLC will protect your assets and allow you to apply for financing, should you need it.
Who should consider forming an LLC?
Any business owner who wants to shield their personal assets from potential business liabilities should consider forming an LLC, especially those working in medium- to high-risk industries like construction, real estate, or health care. Operating as an LLC also adds a level of credibility to your business, which can help when dealing with customers, investors, or lenders.
What is the process of forming an LLC?
In Nebraska, and most of the U.S., you must select a business name that complies with the state naming rules and includes “LLC” or “L.L.C.” You’ll need to check with the Secretary of State to be sure the selected name is available. Next, you’ll file a Certificate of Organization with the Nebraska Secretary of State online or by mail and pay the required filing fee.
Nebraska also requires you to publish a notice of your LLC formation in a local newspaper for three consecutive weeks and then submit proof of publication to the state. After that, it’s wise to draft an operating agreement. Even though it's not required by law, it helps clarify roles and expectations among members. Finally, apply for an Employer Identification Number (EIN) through the IRS. Think of the EIN as your business’ Social Security Number. You’ll need it to open a business bank account or hire employees.
Depending upon your business, you may need another license or permit, and you’ll want to make sure you’re registered with the appropriate departments for the type of business you do.
Although this process is specific to Nebraska, many states have similar requirements for forming an LLC. Requirements for other states can be found by visiting your state’s Secretary of State.
What are the tax implications of operating under an LLC?
Operating under an LLC offers small business owners some unique tax advantages compared to other business structures. Like an S corporation, sole proprietorship, or partnership, an LLC is treated as a pass-through entity, meaning profits and losses pass directly to the owner’s personal tax returns. This setup can simplify tax filing and avoids double taxation. LLC owners can also choose to be taxed as an S corporation or a C corporation if it better suits their financial situations.
Profits are distributed based on the percentage of ownership among members. Keep in mind that owners are responsible for self-employment taxes on their share of income, and it’s a good idea to work with a tax professional to understand deductions, estimated payments, and any state-specific obligations.
Are there ongoing costs or responsibilities associated with maintaining an LLC?
Once your LLC is up and running, it’s important to stay on top of the ongoing responsibilities and costs to keep it in good standing. In Nebraska, you’ll need to file a report with the Secretary of State every two years, along with a filing fee, to maintain your LLC’s active status. You should also maintain accurate business records, update your operating agreement as needed, and keep your personal and business finances separate to protect your liability shield. Depending on your industry, you may need to renew local licenses or permits annually. While LLCs typically have fewer ongoing formalities than corporations, staying organized with deadlines and state requirements will help you avoid penalties or administrative dissolution down the road.
Forming an LLC can give your business a boost in credibility and professionalism, which can strengthen relationships with banks, investors, and customers alike. Banks often prefer working with formal business entities, making it easier to open business accounts or secure financing. The LLC structure signals to potential investors that you’ve taken steps to protect your personal assets and clarify ownership, which can make your business more attractive. Customers and clients may also view an LLC as a sign of legitimacy and stability, helping to build trust in your brand.
While an LLC doesn’t guarantee success, it can create a solid foundation for growth and open doors to opportunities that might be harder to access as a sole proprietorship or informal partnership.
