For any software company to succeed, there are a number of essential ingredients. Having the right product is key. Sound financial leadership is imperative. And of course, marketing and sales efforts must be closely aligned with the target demographic.
And then there are legal matters. Most notably, the legal structure you choose for your software company can have an incredible long-tail effect, impacting everything from how you pay taxes to how you manage risk.
For a majority of software companies, the LLC is the best legal structure, providing elegant solutions to some of the most common problems that software providers face.
The LLC Explained
The LLC, or Limited Liability Company, has been around since the 1970s. Since its inception, it has become one of the most popular options for small businesses around the country. Its utility spans industries, making it a useful structure for real estate companies, app developers, and countless others types of businesses.
To understand what makes the LLC unique, it's important to consider it in light of the alternatives. If you start generating self-employed business income, your default status is Sole Proprietor. What this means is that, in the eyes of the government, there's no real distinction between you and your business. In effect, you are your business.
There's nothing necessarily wrong with this, though it does mean you can't separate personal assets and liabilities from business ones. It also makes it more challenging to bring on employees.
The LLC format solves these issues. When you register your business as an LLC, you establish it as a separate legal entity. The business is its own thing, distinct from its owner. And, you can keep your personal assets and liabilities in one pot while keeping business ones in another.
Why LLCs Make Sense for Software Companies
There are a number of benefits to the LLC structure, including some that are particularly notable for software companies.
Limited Risk
Software development is a famously tumultuous industry, with ample competition and a landscape that can shift rapidly. In short, there's a lot of risk. Thankfully, LLCs provide some built-in mechanisms for risk management.
By separating your personal assets and liabilities from business ones, LLC partners can ensure that their private or familial bank accounts are off-the-table should lawsuits come or creditors come knocking. As such, LLC partners can feel greater peace of mind as they invest in their company.
Improved Credibility
The LLC structure also confers a certain level of professional credibility. That's because gaining LLC status requires you to complete a legal process that validates your business integrity.
To put it differently, becoming an LLC means your company is no longer perceived as a hobby or a side hustle. It's perceived as a "real" business. And that improved credibility can make it easier to bring in investors and other partners.
Streamlined Management
Registering your business as an LLC also makes it much easier to administer the business day in and day out. That's because the LLC structure allows you to choose from a number of simple, clean management models.
For instance, with an LLC, you can:
- Determine to handle day-to-day stuff all by yourself.
- Agree upon an allocation of duties (and profits) with your partners.
- Bring in a third party to manage the business on your behalf.
Simply put, choosing the LLC structure allows you to run the company how you want to run it, without having to worry about stakeholder meetings or some of the other complexities that plague Corporations.
Easier Tax Reporting
When you register your business as an LLC, you'll default to pass-through taxation, meaning you'll simply declare profits and losses on your personal tax return. If you decide it's more beneficial to opt into corporate taxation, you're welcome to do that at any time.
Meanwhile, financial reporting obligations are basically non-existent; again, LLCs are much easier to operate than Corporations, with fewer regulatory burdens to bear.
Registering Your Software Company as an LLC
There are clearly many benefits to registering your software company as an LLC. Now the question is how. If you're having trouble navigating this decision on your own, an LLC service can assist you through the process. The guidelines can vary from one state to the next, but some basic parameters are as follows.
The guidelines can vary from one state to the next, but some basic parameters are as follows.
- Select a name for your company. Every LLC needs a name that isn't already in use by an LLC in the same state. Most states have online directories, making it easy to verify that the desired name is still up for grabs.
- Pick a Registered Agent. Your Agent is someone tasked with receiving legal and tax documents on the LLC's behalf. Some states will let you serve as your own Registered Agent, but it's much more common to hire a designated service. This can be a national company or a local provider, like Northwest Registered Agent. However, the key is to choose a reliable service that meets your needs and budget. Seek the best LLC formation service in your state.
- Create an Operating Agreement. The Operating Agreement functions as a kind of charter for your software LLC. Basically, it outlines how you'll run the company, how you'll split duties with your partners, how you'll bring new partners on board, and more.
- File paperwork. You'll need to file Articles of Organization with your state. That's how you officially register your LLC. Filing fees can vary from state to state, but generally they fall somewhere between $20 and $300.
- Get an Employer Identification Number. Your EIN is necessary before you file taxes or process payroll. You can claim a free number from the IRS (assuming you're a U.S. resident).
- Set up a bank account. It's crucial for your LLC to have a business bank account, distinct from any personal checking or savings accounts you may have. Again, keeping personal and business assets separate is one of the key features of the LLC.
For Streamlined Solutions, Choose an LLC
The bottom line: For software companies to maximize their odds of success, every decision matters. Choosing the LLC format may be one of the smartest decisions you ever make for your business. Take the first steps toward LLC registration today.
Author Bio
Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels related to marketing and business development.