In order to succeed as a coworking operator, there are a number of important requirements. Naturally, you need the right physical space. Solid marketing and branding are also imperative. And then there’s the matter of legal structure.
Simply put, the legal structure you choose for your business can have a massive, long-term effect on how the business functions, how you pay taxes, and even your ability to recruit employees.
While there are a number of legal structures you might choose from, one of the most popular options is the Limited Liability Company, or LLC. It’s essential for coworking operators to have a clear sense of what the LLC is, how it benefits their business, and how they can start an LLC of their own.
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Let’s start with a definition. LLCs have been around since the 1970s. They were originally created to support real estate companies, but since that time have become popular across virtually every industry. LLCs rank among the most common small business structures in the United States.
To understand what makes an LLC unique, it’s important to contrast it with other legal structures. When you launch your own business and start generating revenues, the government automatically classifies you as a Sole Proprietor. This is a legal designation that does not acknowledge any distinction between you and your business; you effectively are the business.
There’s nothing wrong with operating a business in this way, and for some entrepreneurs, the Sole Proprietorship model is the way to go. However, there are also some limitations: For example, it’s tough to bring on employees. You also expose yourself to immense personal risk when you’re a Sole Proprietor.
LLCs address these problems by creating a new legal entity. When you register your business as an LLC, you can keep your business interests separate from your personal interests. In other words, you can have one pot for your business assets and liabilities and then a separate pot for personal stuff. The upside of this, as we’ll soon see, is significant personal risk protection.
But if an LLC offers more robust protections than a Sole Proprietorship, it also offers less regulatory overhead than a Corporation. When you choose the LLC structure for your coworking business, you don’t have to worry about things like shareholder meetings or complicated annual financial reports.
In short, LLCs provide the “sweet spot” that many small business owners desire.
It’s worth pausing to consider the benefits of the LLC in greater detail. Why does the LLC format make so much sense for coworking space operators, in particular? Consider just a few of the more pronounced benefits.
As we’ve already noted, LLCs allow you to keep your business assets and liabilities separate from your personal assets and liabilities. This provides a lot of risk mitigation. Specifically, it means your personal assets are off the table should litigation or aggressive creditors come your way.
Launching any type of business invites risk, and coworking spaces are no different. The LLC structure provides a high degree of built-in risk management.
LLCs also allow you to operate your business with a much higher degree of professional credibility.
In order to register your company as an LLC, you have to jump through a few legal hoops; we’ll explain more later in this article. Doing so demonstrates that you’re operating a real, serious, reputable business, not just a side hustle. This makes it much easier to win the trust and goodwill of investors, customers, and potential partners.
The business landscape can change quickly, making it essential for entrepreneurs to remain adaptive. LLCs offer a lot of built-in flexibility, providing lots of ways for you to pivot and adapt.
For example, with an LLC, you have lots of leeway with regard to how you structure your management team and how you divide profits among your partners. And, you have flexibility with regard to how you report to the IRS. In fact, LLCs can report on either a pass-through or corporate basis. Such flexibility allows your business to remain incredibly nimble.
Clearly, there are a number of reasons why you might register your business as an LLC. The next question is how.
There are a few steps required to create an LLC, and those requirements can vary by state. For instance, a step-by-step lesson to form an LLC in Florida might look a bit different than a step-by-step guide for Wyoming, Delaware, or Nevada. With that said, the trajectory usually looks something like this.
One of the first steps in the LLC registration process is choosing the right name for your business.
Your name must be chosen on the basis of more than just branding and marketing. There are important legal considerations, too. For example, most states will require you to choose a name that isn’t already in use by another LLC. (There should be a state-specific online directory where you can confirm that the name you want is still up for grabs.)
Also, note that most states mandate that your legal name include LLC or Limited Liability Company. You can always register a “dba” (doing business as) name if you want to operate under a less clunky brand signifier.
Every LLC is required to have a person or organization who receives legal and tax correspondence on the business’ behalf. This entity is known as your Registered Agent.
When selecting a Registered Agent, the most important consideration is choosing someone who has a physical mailing address in the state where you operate. A P.O. Box won’t do.
Some states will allow you to serve as your own Agent, but it’s much more common to hire a third party. Note that third-party Registered Agent services usually cost somewhere between $50 and $200 annually, so it’s usually not a major expense.
As you might imagine, creating a whole new legal entity involves a little bit of government documentation. The paperwork requirements really aren’t too onerous, but there are a couple of documents you’ll need to have in place.
Also, be aware that when you file your Articles of Organization, you’ll be expected to pay an LLC registration fee. In most states, this fee is somewhere between $20 and $300.
You won’t necessarily need an Employer Identification Number right away, but you’ll need it before you can pay your taxes or administer payroll.
Luckily, securing a number is pretty simple. In fact, if you’re a U.S. resident, you can get an EIN for free simply by visiting the IRS website. There is usually very little wait time expected for EINs.
Keep in mind that one of the primary benefits of the LLC is how you get to separate your business assets and liabilities from your personal ones. One way to take advantage of this benefit is by creating a business bank account that’s distinct from your personal checking and savings accounts.
Depending on the state you’re in, there may be certain annual requirements you must meet in order to maintain LLC status. Some examples include
Maintaining these requirements allows you to keep your LLC status current.
For most coworking operators, the ideal way to structure the business is with an LLC. To yield the benefits of the LLC, make sure you’re following the guidelines laid out by the state of your residence.
Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about content and social media marketing. She also writes prolifically on topics related to small business ownership.