You have an excellent idea for a product or a service, you’ve fleshed out a solid business plan, and now you’re ready for revenue to start rolling in. But before your business gets up and running, you’ll need to choose a business structure. This will determine your registration requirements, tax obligations, and personal liability.
The most common business structures for small businesses are sole proprietorship, partnership, limited liability company (LLC), and corporation. Forming an LLC has become a popular choice for small business owners. This structure offers liability protections, potential tax benefits, and management flexibility.
Read on to learn what an LLC is, its advantages, how it differs from a sole proprietorship, and how to set up your small business as an LLC in Oregon.
What Is a Limited Liability Company (LLC)?
A limited liability company is a business designation that protects its owners’ personal assets from their business’s debts and liabilities. The business acts as its own legal entity, so it retains all the responsibility for debts and liabilities.
For instance, if an LLC files for bankruptcy or is sued in a lawsuit, the business owners’ personal assets, such as bank accounts, homes, and cars, may remain protected. That is the main benefit of operating as an LLC as opposed to being a sole proprietor.
A single-member LLC is when there is only one business owner. In contrast, a multi-member LLC has two or more owners, and owners are called members.
How Can a Business Benefit from Becoming an LLC?
Protection of personal assets is certainly an attractive feature. But choosing an LLC as your business entity comes with additional benefits as well. Below is a breakdown of what they are.
An LLC is a pass-through taxation entity. This means that its owners’ profits and losses pass through to their personal tax returns and are taxed at their personal income tax rate.
Additionally, LLC owners pay income taxes on the business’s annual profits only once. Since an LLC does not pay any federal corporate income tax, the owners avoid double taxation.
Inexpensive and easy to form
LLCs are relatively inexpensive to form and maintain. The main expense is the filing fee that each state requires. These vary by state and can range from $40 to $500. The fee for forming an LLC in Oregon is $100.
Flexibility with management and profit distribution
Unlike corporations overseen by a board of directors and officers appointed to run the business’s day-to-day operations, LLCs are not required to have a fixed management structure. Instead, LLC owners have complete control over how they want to run their businesses with minimal recordkeeping and reporting requirements.
LLCs also have flexibility in how they distribute profits to owners. That’s because there are no requirements to distribute profits according to ownership percentages, unlike with other types of business structures. For instance, the LLC may have two owners but agree that one will receive a larger share of the profits, perhaps because they contributed more money or labor during the startup phase.
LLCs vs. Sole Proprietorships
A sole proprietorship is an unincorporated business with just one owner. This type of business entity is typically a good choice for solo business owners, consultants, and freelancers, who can conduct business under their own names instead of having a separate business name.
A sole proprietorship is not a separate business entity. This business structure lacks the liability protections of an LLC, and the owner does not have to separate business assets and liabilities from their personal assets and liabilities—though it is still a good idea to do so.
For this reason, a sole proprietorship is typically better for a very small-sized business with little risk, low profits, and a small customer or client base. It could also be a good choice to test out a new business concept before committing to forming an LLC.
If your business carries some risk, has the potential for hefty profits, has a large customer base, or will have employees, an LLC may be the better fit. It will provide this type of business more protection than a sole proprietorship.
How to Set Up Your Business as an LLC in Oregon
If you’ve looked at the types of business structures and decided that an LLC is the best choice for you, you can follow the steps below for forming and registering your business as an LLC in Oregon.
1. Pick a name for your business.
When you choose an LLC as your business structure, you must ensure that your business name is unique from all the other business names on file with the Oregon Secretary of State. You can do a quick business name search on the Oregon Secretary of State’s website.
2. Register your business in Oregon.
State law requires LLCs to register with the state of Oregon.
Oregon state law does not require an LLC operating agreement, but it is still a best practice to have one.
You’ll also need to name a registered agent—yourself or someone else. A registered agent is the individual or business entity that receives legal documents, notices, and updates from the Oregon Secretary of State on behalf of your LLC.
You can file your business formation documents online through the Oregon Business Registry or by mail. You can find forms and a complete fee schedule for registering your business with the state here.
3. Understand your tax obligations.
Most businesses will need to apply to the IRS to obtain an employer identification number (EIN). If your business will be hiring employees right away, you will also need a business identification number (BIN), which is your state payroll tax identification number. (Note: Don’t get a BIN unless you have employees or will soon.)
For more information about starting a business and paying taxes, you can read the Oregon Start a Business Guide. You may also want to consult with a professional tax adviser or an accountant.
The Bottom Line on This Business Structure
Forming an LLC provides asset and liability protections, potential tax benefits, and flexibility for small businesses. To determine if it is the best fit for your business, we recommend speaking with an accountant and an attorney who can guide you in the right direction.
Do you need advice on starting a small business in Oregon? The Oregon SBDC is here to help. We have regional Centers located across the state to serve business owners from startup to succession. Click here to find a Center near you.
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