What Happens If You Don’t Create an LLC When You Start Your Business?

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Many small businesses begin as either a sole proprietorship or a limited liability company (LLC). Although a sole proprietorship is the cheapest and simplest form of business structure to set up, that is its only real advantage over an LLC. On the other hand, an LLC has several significant advantages over a sole proprietorship that you will miss out on if you don’t form an LLC when you start your business.

Limited Liability

A sole proprietorship does not provide any liability protection for the owner from the company’s debts or other financial liabilities. The sole proprietor thus is personally liable for these obligations, which can lead to bankruptcy if the sole proprietor has insufficient assets to cover them. 

By contrast, an LLC does provide limited liability protection. This is because, like a corporation, an LLC is viewed as an entity that is legally separate from its owner (often referred to as a member). As a result, an LLC’s members are not personally liable for legal judgments against the LLC, the company’s debts, or any of its other financial obligations except when the law explicitly says otherwise or unless the person is not following the legal requirements of being an LLC.

Although members can lose their capital contributions to the LLC to pay the company’s debts or legal liabilities, their homes, individual bank accounts, and other personal assets are not at risk. 

It is important to note that an LLC does not provide personal liability protection for claims arising from a member’s acts or omissions. Rather, it only shields members from personal liability for the acts or omissions of the LLC itself. Members can still be held personally liable if they personally cause harm to someone else, for example by running a red light and hitting another vehicle. Similarly, if an LLC member personally guarantees a business debt, they will be liable for that debt.

The Ability to Elect S Corporation Status 

A sole proprietor must pay both income and self-employment (FICA) taxes on all of the company’s profits. However, an LLC can elect S corporation status, which treats the LLC’s members as employees of the company and allows them to pay themselves a relatively low “reasonable salary.” This salary is subject to both FICA and income taxes, but the members’ share of additional profits is only subject to income tax. This can result in significant savings. 

The Ability to Have More Than One Owner 

A sole proprietorship can only have one owner, while an LLC can have one or more members. An LLC thus has the potential to grow much larger than a sole proprietorship. 

How to Form an LLC In Arizona

Forming an LLC in Arizona is relatively simple. To do so, take the following steps:

– Select a name for the LLC after searching through the Arizona Corporation Commission’s (AAC) names database to make sure a particular name hasn’t been taken.

– File the LLC’s Articles of Incorporation with the ACC.

– Create an operating agreement, which states who the owners are, how distributions should be made, how the LLC will be run, who has authority to transact business, and what happens at the time of death. (You should strongly considering holding your LLC interest in a Trust). 

Appoint a statutory agent, which is a person or entity that can accept service of process and other official documents on the company’s behalf and forward them to the appropriate individuals  (link article here).

– Publish the Articles of Organization (if in Maricopa County then publication with the ACC is fine, if outside of Maricopa County then you may need to publish it in an approved newspaper within 60 days of the filing.)

– Obtain an employee identification number (EIN) from the IRS, which the IRS will use to identify the LLC for tax purposes.

– Obtain any business licenses that the LLC requires to operate.

– Register the LLC with the Arizona Department of Revenue if it plans to sell goods that are subject to Arizona sales tax or if it has an employee for which you will need to pay unemployment insurance. 

Contact Counxel Legal Firm

If you would like to learn more about forming an LLC, contact us at (480) 744-6621 or at request@counxel.com. Don’t forget to check out the good things that others are saying about the services they received from Timothy Coons on Google.

This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact request@counxel.com or (480) 744-6621 to request specific information for your situation.

*Conveniently located off the 101 Freeway and the US 60 in the middle of Phoenix, Scottsdale, Tempe, Chandler, Gilbert, Mesa, and Queen Creek!

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