A startup is a young company that has been developed by a unique business idea and aims to make an instant impact on the market. The startups that are highly valued are known as Unicorns. The United States and China have the highest number of Unicorns so far.
App development startups focus on building highly scalable apps by utilizing the latest technologies and trends to meet user expectations. A major consideration is the selection of the right legal structure for app development startups.
Choosing the right legal structure depends on various factors such as your startup’s size, ownership structure, liability concerns, tax implications, and funding requirements. The most common legal structures available for your app development startup are –
- Limited Liability Corporation (LLC)
- Corporation
- Sole-Proprietorship
- Partnership
Each business structure has its own benefits and drawbacks. Starting your app development startup as an LLC provides numerous benefits.
Let’s dive in further to discuss all of them in detail and help you make the right decision for your app development startup.
What is an LLC?
So what is an LLC business structure actually? An LLC is a business structure that combines the features of a corporation and a sole proprietorship. It offers limited liability protection like a Corporation and the tax benefits like a Sole Proprietorship. This makes an LLC fall under the category of Hybrid entities. This legal structure protects and safeguards your personal assets in case your app development startup gets sued or engages in any lawsuit.
How to Form an LLC for your App Development Business
To form an LLC for your app development business:
- Select your State:
Form your LLC business in the state you reside in. This saves you from paying double state filing fees. For instance, if you reside in Florida, form your LLC in Florida.
- Pick a Name:
Choose a suitable name for your business that is unique and resonates with your business. Research thoroughly before picking any name, as your name cannot be similar to someone else’s. Add “LLC” after your business name. For instance, your business name is “XYZ Solutions”, your LLC business name should be “XYZ Solutions LLC”.
- Hire an LLC Registered Agent:
For smooth forming of your LLC business, hire an LLC registered agent. This agent will look after forming your LLC business, handle your taxes, and keep you posted on new updates and regulations regarding your LLC.
- Create an LLC Operating Document:
An LLC operating document outlines how your LLC business will operate, its role, ownership structure, roles and responsibilities of owners, rules and regulations. Though this document is not mandatory, it is still required in a few states.
- File your Articles of Organization:
Articles of Organization contain all the basic details about your company such as the company’s name, address, and the members or owners (LLC members are also known as owners). You are required to file an article on organization with the Secretary of the State.
- Obtain an EIN:
An EIN is an Employer Identification Number is also known as a Federal Tax Identification Number. This is required to identify a business entity, and also for your app development startup’s tax purposes. You can obtain this online through the IRS.
Benefits of App Development Business as an LLC
As we discussed earlier, an LLC business structure provides amazing benefits for your startup, such as-
- Limited Liability Protection
- Tax Benefits
- Flexible Management
- Increased Credibility
Let’s discuss all these benefits in detail.
1. Limited Liability protection
Limited liability is a legal protection that prevents you from being personally held liable for your startup’s debts or financial losses. It lets you keep your business finances separate from your personal finances. Even if your business incurs any loss, you will not be required to compensate for the loss using your personal finances. An LLC business structure is really helpful for your startup if you wish to safeguard your personal assets.
Example-1:
One of your clients slips over a wet floor and suffers a minor fracture inside your office premises. He believes your company is responsible for his loss and decides to sue your company for the damages. In this scenario, having limited liability of an LLC will safeguard your personal assets and limit compensation to only your business assets.
Example-2:
One of the apps that your company developed was found to be very similar to an unlicensed app developed by another company. The other company decides to sue your company for patent infringement. If the court declares you liable to pay the damages, the limited liability protection of an LLC business structure will protect from the damages being imposed on your personal assets.
Example-3:
One of your strong competitors claims that one of your apps contains code that was copied from his app. He decides to file a lawsuit of theft against your development company. The court helds you liable for the losses and damages. In this case, your LLC’s limited liability protection will act as a shield, protecting your personal assets.
Example-4:
Your app development company suffers a really serious data breach in which the important and confidential data of your customers get leaked. A few of your clients altogether decide to file a lawsuit against your company for this security breach. the damages that you would be required to pay would only be levied against your company’s assets if you have an LLC business structure.
Even in the events of loan default or commercial bankruptcy, having an LLC business structure will protect and safeguard your personal assets.
2. Tax Benefits
Forming an LLC gives you the privilege to choose whether you want your business to be taxed as a corporation or a pass-through entity.
For instance,
If you choose to be taxed as a sole proprietorship (pass-through taxation), you can avoid double taxation. Double taxation occurs when you choose to be taxed as a corporation, where the company pays taxes on its income and the owners and shareholders also pay taxes on the personal returns on the dividend they receive.
Also, an LLC business structure can write-off a number of expenses as business tax deductions to lower your tax-paying amount. Common deductible business expenses include:
- Education
- Home Office
- Bank & Interest Fees
- Internet Expenses
- Travel Expenses
- Charitable Donations
- Health & Disability Insurance, and many more.
Claiming these deductions depends upon how your LLC business prefers to be taxed. If taxed as a corporation, the deductions are claimed at the business level. Whereas, if your LLC is taxed as a pass-through entity, the deductions are claimed at a personal level. This flexibility lets you select the best tax approach suitable for your business.
3. Flexible Management
An LLC business structure offers flexibility when it comes to ownership and management structure. It can be managed by one or more persons, and the transfer of ownership is simple and relatively easy. If you are looking to grow and expand your business quickly, this flexibility in management is ideal for your business.
4. Increased Credibility
When you register your app development business as an LLC, you increase the credibility of your business. This lets you easily open a business bank account, attract investors, and more.
When developing an app or software, it is common to look for a few funding options. And we all know that investor funding is not possible without trust and assurance. The structure of your business and the features of your app play a major role in attracting investors to fund your app. Forming an LLC builds trust in the investors that the money they invest will be safe and their investment will be worthy.
Bottom Line
Choosing the right business structure is a major consideration for your app development business for numerous reasons. Forming an LLC is the ideal option, as it protects and safeguards your personal assets during the time of a lawsuit, and also lets you choose how you want your business to be taxed. Ultimately, your app thriving in the market is all that matters!
