Naming a limited liability company or corporation involves more than just selecting the preferred legal name for your business. States generally have naming rules that you must satisfy before they will file your documents to form the entity. They may also have restrictions concerning required words or prohibited words. CT Tip: A name reservation can help you preserve your preferred legal name in a state before you are ready to file to form.
What is an LLC?
An LLC, also known as a limited liability company, separates the assets and liabilities of your business from your personal assets. If your business faces a lawsuit, an LLC can protect your personal assets from any judgments awarded against the company. However, if your company doesn’t follow through with the required paperwork or other steps to establish it as a legal entity, someone could “pierce the corporate veil” and seek your personal assets.
CT Tip: The LLC structure typically allows for more flexibility than other business structures in how profits, losses and tax items are allocated among the owners. This is because state laws typically provide automatic or default rules, which can be amended via the operating agreement.
Most states require that your LLC’s legal name include words that indicate the business structure, such as Corporation, Incorporated or Company, and some states require you to list a registered agent in the state where you’re filing. You may also choose to register a DBA (doing business as) name for public-facing purposes, which can be different from the official legal name filed with your state.
What is the difference between an LLC and a corporation?
While both LLCs and corporations provide legal protection for their founders, the structure of each entity has different tax implications. An LLC is treated as a pass-through entity for taxes, meaning profit and loss passes through the company to its owners for reporting on personal tax returns. In contrast, a corporation is taxed at the corporate level and then again when shareholders receive dividends.
In addition, LLCs may have fewer reporting and record keeping requirements than corporations. Corporations generally must maintain bylaws, hold annual meetings, and have a board of directors. The management structure of an LLC is flexible as it can be either member-managed or manager-managed. In contrast, a corporation has a more formal management structure and must adhere to strict record keeping and reporting requirements. Moreover, it is important to note that the right to transfer membership interests between individuals is dictated in an LLC’s operating agreement and can be restricted based on the terms of the agreement.
What are the advantages of an LLC?
An LLC is one of the most flexible business structures available. It can be taxed either like a sole proprietorship or like a corporation. It is also easy to form. Business owners can also choose whether or not to have a manager manage the company’s operations and if members will share in management responsibility.
Another advantage is liability protection. Unlike in the case of a sole proprietorship or partnership, an LLC provides its members with personal asset protection from claims against the business. The exception to this is if the business owner does something that allows creditors to pierce the corporate veil, such as mixing personal finance accounts with business accounts or committing fraud.
Lastly, an LLC can provide its owners with more flexibility in profit sharing. For example, LLCs can be established with an operating agreement that stipulates how profits and other tax items will be shared. This is a significant benefit compared to other structures, such as corporations, where the allocation of tax items must match ownership interests.
What are the disadvantages of an LLC?
The primary benefit of an LLC is that it protects members from personal liability if the company goes bankrupt or experiences other financial issues. However, this advantage may be offset by high filing and renewal fees.
Another disadvantage is that an LLC cannot retain profits on a corporate level; the company’s earnings must be shared among owners or reinvested in the business. Additionally, the LLC structure is subject to self-employment taxes and requires a separate account for federal items such as Medicare and Social Security.
When selecting an LLC name, it’s important to choose one that’s memorable and will appeal to potential customers. A memorable name will help a business stand out from competitors and can increase brand recognition. The name should also be versatile enough to allow for future expansion, and avoid pigeonholing the company into a specific location or service. It’s also a good idea to check with a domain registrar to make sure the desired name is available.