You have a business idea all ready to go, but now you’re faced with one of your first big questions: “Should I start an LLC?” The decision of whether or not to incorporate your business is a major turning point in the lifecycle of any company. Perhaps you have been operating for a while as a sole proprietorship and are looking to take that next big step. Or you might really have your heart set on starting your venture off as a Limited Liability Company (LLC).
Whatever the case may be, let’s review some of the key considerations you should keep in mind before launching full-on into the world of an LLC. After all, strategy is key in the management of any successful business. So take your time to think about whether starting an LLC is the best move for you right now.
Do You Really Need an LLC?
Although you might be tempted to leap into creating an LLC, you can still operate your business as a sole proprietorship, partnership or another kind of company without taking the time to incorporate. But the more you know about how an LLC works, the better equipped you’ll be to act decisively. So let’s delve into the advantages and disadvantages an LLC brings to the table.
Perks of Creating an LLC
Incorporation is often a tool for businesses who are looking to streamline their operations. So the amount of effort involved in the back-end processes is greatly reduced once you’ve filed your Articles of Organizationand established an Operating Agreement. Moreover, as an LLC, you’ll enjoy the eponymous “limited liability,” meaning that your personal assets remain off-limits even if your company gets in legal trouble down the line. Similarly, filing tax returns is simple: in the eyes of the federal government, you’ll be a pass-through entity where profits and losses flow through directly to the company’s owners and are reported with their personal taxes.
Downside of Starting an LLC
Aside from the fact that an LLC may not be the right choice for your business (a distinction only you can make), becoming an LLC might not help you when it comes to attracting investors. The very nature of an LLC — from the absence of a board of directors to its pass-through tax status — goes against what will likely draw venture capitalists and the like. So, if raising money looks to be a key element in your business, you may benefit more from a different type of business entity.
Should I Start an LLC? What to Ask Yourself
If you’ve already decided that an LLC is the right fit for your business model, then congratulations. But you should still be sure that you’re ready to make a real go of your business, LLC or not. With that in mind, here are a few key questions you’ll want to ask yourself before you spend the time and money to file the paperwork.
Have You Crunched the Numbers?
Before your business kicks into high gear, you want to know exactly what you’re dealing with. For example, what is the concentration of businesses like yours out there? This one is especially true if you aim to serve your local community, as you might find yourself entering an already-stacked market.
If you find an absence of businesses serving your target audience, you might want to do some research to find out why. If there’s an underlying reason behind it, you might be facing a greater uphill battle than you anticipated. Plus, you’ll need to know exactly how much your expenses will be and whether you’re willing to stake your business on covering that. Do you have enough lead time to make your business venture financially viable?
Have You Engaged with Your Field?
Regardless of what kind of business you’re getting into, you’ll still want to find out what professional associations exist for your area, specialty or industry. Even if there isn’t a local chapter around, you can often participate in these virtually, giving you access to tons of insider data regarding pricing, sales and other important figures.
You can then use this information to form your ultimate conclusion regarding whether your business idea is truly primed and ready to go. If your business requires specific licensing or other upfront costs, this will affect your initial profitability and have a direct impact on the “numbers” we referenced above.
Have You Reached Out to Your Community?
This one might sound a similar to our last point, but there's an important distinction: while reaching out to professional associations can give you an inside track on operations, now we’re talking about connecting to the actual people you’ll be serving and working alongside. Of course, your competition may or may not be particularly welcoming, but other business owners — and especially your prospective customers — can provide plenty of insight for an incoming business like yours.
You should take note of best practices and any process improvements others would have made early on. Also, chat with customers directly to gauge their thoughts on your product or service, including potential pricing and general feedback about your future business plans.
Have You Consulted the Experts?
In case it isn’t apparent yet, the key to knowing if your business idea is ready to launch really lies in putting yourself out there and going on fact-finding missions. Consult with relevant professional associations, possible customers, other business owners and — in this particular section — industry experts themselves.
Look for former business owners, your local chamber of commerce or others who have the seen firsthand what it takes to build a successful company from the ground up. Thinking about starting a business and being in the midst of it is something else entirely — you'll want to connect with those who’ve studied business intimately and who’ve lived the other side of the success you aspire to.
Have You Tested Your Business Idea?
You can have all the ideas you want, but your chances of success are infinitely better if you have some hands-on experience. Before you make your business an LLC, start small with a few clients, or begin working under someone else in a similar business. This will help you get a clearer picture of whether you really want to work within this industry before you’re any more invested.
For instance, you could begin to dabble in your new business idea even while you balance your current role, creating a scenario in which you can gradually (and seamlessly) transition from one business to another.
Ready, Set, Grow
Creating an LLC is a big step for your business, and hopefully, the above questions have jumpstarted your thinking about whether it's time for you to start one. Maybe forming an LLC is what’s best for your business, and maybe it's not — in any case, you'll want to be certain of your next steps before you take them.
At Incfile, we want to prepare you for the many decisions you’ll have to make on behalf of your business, as well as the challenges you’ll have to face. Our extensive pool of resources will get you up to speed fast and give you a competitive edge. If you have any questions about whether you should incorporate your business or how to do so, reach out so we can help kickstart your business growth strategy. To learn more, check out our website and get started today.
Robert Yaniz Jr.
Robert Yaniz Jr. has been a professional writer since 2004, including print and online publications. Much of his experience centers on the business world, including work for a major regional business newspaper and a global law firm