LLC Financing
With all of the overwhelming legal and tax complexities associated with incorporating a business, but the lack of liability protection for a general partner in any form of a business partnership, sometimes business owners cannot decide the best option for their business. This is when business owner’s start considering the idea of classifying their business as a limited liability company, or LLC. Other countries, such as Germany and France, have had similar business structures for years, but the first United States limited liability company formed was in 1977 in Wyoming, however it took around 20 years after that before other states started following suit; the Internal Revenue Service did not even create a uniform set of laws for taxing limited liability companies until 1996! All in all, this is still considered a relatively new way of structuring a business. Limited liability companies are quickly becoming a much preferred business structure because of its hybrid nature of offering some of the best advantages of sole proprietorships, partnerships, and corporations.
Limited liability companies essentially provide business owners with the ideal liability protection that corporations offer without the double taxation caveat. Just like a sole proprietorship or partnership, limited liability companies are able to have the earnings and losses from the business pass through to the owners to include on their personal tax returns. While all limited liability companies do not pay federal income taxes, some states do apply an annual tax to limited liability companies. Also, limited liability companies are allowed to operate with a single member, allowing a single member limited liability company to avoid having to pay corporation fees. This means that the Internal Revenue Service will tax your business as a sole proprietorship. If a limited liability company has multiple members, the Internal Revenue Service will essentially treat the business like a partnership, which means that each owner is taxed on their share of the profits. A business owner can also chose to have their limited liability company to be taxed as a corporation or an S corporation.
Setting Up a Limited Liability Company
A limited liability company has the advantage of avoiding the difficult set up of a corporation. There are five basic steps to setting up your limited liability company:
- 1. Choose Your Business Name: This step has more requirements than a partnership or corporation and consists of three rules: it cannot be the same name as an existing limited liability company in your state, it must have “limited liability corporation” in the name, and it cannot include restricted words. Restricted words vary from state to state, but typically include “bank”, “insurance”, and so forth.
- 2. File the Articles of Organization: This document is incredibly similar to the Articles of Incorporation that must be filed for a new corporation. It helps legitimize your business by including general information such as your business name, address, and the names of its members. Just like the Articles of Incorporation, this is typically filed with the Secretary of State, but depending on the state your business is in, this may need to be filed somewhere else.
- 3. Create an Operating Agreement: Similar to a partnership agreement, this is not required by most states, but it is highly recommended to outline rules, regulations, agreements, how to settle disagreements in the future, and whatever else is relevant to your business. This can help multi-member limited liability companies to avoid disagreements that could hurt the business.
- 4. Obtain Licenses and Permits: This is a typical requirement for any business structure that varies from state to state.
- 5. Announce Your Business: Not every state requires this step, but checking with your state’s business filing office to see if it is necessary is important. If your limited liability company is required to announce your business, it is typically done by publishing a statement in your local newspaper.
Advantages of a Limited Liability Company
- The biggest advantage to having classifying a business as a limited liability company is, as the name states, the limited liability innately associated with this business structure. If a limited liability company is sued or has debt, a member’s personal assets are typically exempt, similar to a corporation’s limited liability for its shareholders.
- The form of “push through” taxes is another major benefit of a limited liability company, allowing businesses to avoid the double taxation of corporations.
- Really, a limited liability company is incredibly similar to an S corporation, especially when it comes to the major tax advantages associated with a limited liability company. The benefit of a limited liability company over an S corporation, however, is the ability to have as many shareholders as they want. In a limited liability company, any member or owner is allowed to fully participate in the business unlike an S corporation.
- Credibility is an issue for most sole proprietorships, but having the ability to enhance your credibility by becoming a limited liability company is sometimes a deciding factor for business owners. This does not mean partners, suppliers, and lenders will not do business with you simply because you are a sole proprietorship over a limited liability company, but it will hopefully eliminate the possibility of that outcome.
Disadvantages of a Limited Liability Company
- Once again, as the name states, the scope of liability protection is, well, limited. This means that members can be impacted by the wrongful acts of their members and employees if the situation permits.
- Depending on the limited liability company, certain earnings can become subject to self-employment tax. There can also be extra taxation in the event that an existing business converts to a limited liability company through tax recognition on appreciated assets.
- Many business owners like the idea of a corporation because of its perpetual life; something a limited liability company does not offer. Limited liability companies typically dissolve when the member dies or retires.
- While many legal complexities are taken out of the equation with limited liability companies, this is not true if your limited liability company plans to operate in multiple states, or even internationally. This does not mean it cannot be done, it just means there are plenty of legal obstacles associated with each state, so consulting a professional is highly recommended.
Why Would a Limited Liability Company Need a Loan
While creating a limited liability company is not nearly has tedious and expensive as incorporating your business, there are still fees associated with this; there are always financing options available to business owners looking to take the next steps. Many established limited liability companies are also in need of loan options for a variety of key business areas. The most common situations involve hiring new employees, covering essential payroll costs during slow periods, insurance for a limited liability company, financing new equipment, renovating a business, expanding a business, working capital, opening another storefront location for a business, and purchasing more inventory for peak seasons. Another major area that business owners across all industries and business structures are seeking funding for is creating effective marketing strategies to implement into their social media campaigns, while implementing the latest technology into their companies. Technology, social media, and mobile sites are completely revolutionizing the country today, and any limited liability company looking to stay ahead of the competition should consider the various financing options to make this transition.
Types of LLC Loans
| Types | Rates | Terms | Funding |
|---|---|---|---|
| Bank | 6-10% | 3-7 years | 14-30 days |
| SBA | 6-10% | 3-7 years | 10-30 days |
| Line of Credit | 5-15% | 1 – 3 years | 7-30 days |
| Alternative | 6-25% | 1-5 years | 5-7 days |
| Cash Advance | 1.16-1.55 | 3-24 months | 1-3 days |
LLC Bank Loans
Conventional bank loans are your standard, run-of-the-mill financing option for most U.S. companies. While not easy to get because of their tough credit, profitability and collateral requirements, they do offer LLCs with the best rates and term of all commercial financing options.
- Rates: 5-10%
- Terms: 1-25 years
LLC SBA Loans
SBA loans are very similar to most traditional lending products, and that’s because SBA financing is offered by traditional banks and credit unions. The difference between SBA loans and conventional bank loans is the fact the government agrees to cover a portion of the SBA loan’s cost should the LLC default on the loan. SBA financing comes in the form of both term loans and lines of credit.
- Rates: 6-8%
- Terms: 3-25 years
Alternative LLC Loans
For LLCs in need of quick finaning, or who have not been able to get approved by a bank or credit union, the next best option is limited liability company alternative financing. Alternative loans focus more on a LLCs cash-flow and less on credit than traditional financing institutions, leading to a fairly high approval rate. Funding can be completed within a week with minimal documentation.
- Rates: 9-25%
- Terms: 1-5 years
LLC Cash Advance
Cash advances to LLCs aren’t really loans at all. Instead, they are the sale of the LLC’s future revenue or receivables in return for immediate financing. The limited liability company will provide bank statements and/or credit card statements to the cash advance funder, and the funder will then determine the appropriate amount to fund the company. After funding, the LLC will repay the loan on a daily or weekly basis via their credit card processing or by having a set amount taken each day from the LLC’s bank account via ACH.
- Factor Rates: 1.16-1.50%
- Terms: 4 months – 2 years
