For AI businesses, the landscape is changing at an astonishing rate. This can be incredibly exciting, but also pretty risky. New AI ventures are poised to lead the way in disruptive technology, but also to fall prey to litigation, an unfavorable regulatory environment, or simply shifts in consumer preference.
What can AI companies do to shield themselves from risk? One important step toward risk mitigation is forming the right kind of legal entity. For many AI companies, that means registering as a Limited Liability Company, or LLC for short.
What is an LLC?
You’ve doubtless heard of LLCs, but what does this term mean in a legal sense?
Here’s one way to think about it. When you start generating income on the basis of self-employed activity, you are automatically classified as a Sole Proprietor. This designation does not acknowledge any legal distinction between the business and owner; or, between business finances and personal finances. In short, if the business is beset by creditors or by litigation, it could bleed over into the personal realm.
One way to avoid this risk is by forming a Corporation. Corporations have many benefits, but they also come with rigid regulatory and administrative requirements. You will be required to sell shares, to hold stakeholder meetings, and to release public finance reports, among other things.
The LLC format is popular because it splits the difference, offering some of the flexibility of Sole Proprietorship along with some of the legal protections of the Corporation. An LLC does establish your business as its own legal entity, allowing you to keep your finances separated into the business and the personal. At the same time, LLCs do not have anywhere near the regulatory burdens that Corporations must deal with.
The Benefits of Registering an LLC
The LLC format offers a number of advantages that can position your AI venture for long-term success, mitigating your risk exposure while also offering tax benefits, greater administrative flexibility, and more.
Liability Protections
Probably the most consequential advantage of registering an LLC is the limited personal liability it offers. LLC members (or owners) are typically not personally liable for the debts and liabilities of the business, except in extraordinary legal circumstances. This means that their personal assets, such as homes and cars, are off-the-table to lawsuits and business creditors.
Pass-through Taxation
Tax flexibility is another major benefit of the LLC format. By default, LLCs enjoy pass-through taxation status, where business profits and losses pass through the business to the individual members. This means that the LLC itself does not pay taxes on its income, but rather the members report their share of the profits or losses and then pay their normal tax rate. LLCs can opt into corporate tax status should they deem it financially advantageous to do so.
Flexibility in Management and Ownership
LLCs offer much wiggle-room in terms of management structure and day-to-day administration. Members can choose to run a self-managed LLC or to designate managers to handle operations. These managers can be employees or outsourced third parties. Additionally, there are fewer regulatory requirements compared with Corporations.
Enhanced Credibility
Registering as an LLC also enhances your AI business’s credibility. It signals to customers, investors, and partners that you are a legitimate business, professional and serious. In the wild west of AI, this credibility can be incredibly important for fostering relationships and earning trust.
Perpetual Existence
Unlike Sole Proprietorships, LLCs enjoy perpetual existence. This means that the business can continue to exist beyond the death or departure of its members, which can be invaluable for long-term strategy and succession planning.
Privacy
Registering an LLC may also mean greater privacy for the LLC’s members. In some states, member identities may not need to be disclosed publicly, providing a level of anonymity. And there is usually not a requirement to make public your financial records, which is not true of Corporations.
Financial Options
Finally, note that LLCs can qualify for a broader range of business loans and lines of credit, compared with Sole Proprietorships. In other words, it may be easier to secure the capital necessary for expanding your AI venture.
Forming an LLC: Strategic Considerations for Your AI Business
When it comes to actually registering your business as an LLC, there are a few considerations to keep top-of-mind.
Register in the Right State
While it’s legal to register in any state, the rule of thumb is to do so in whichever state you’re actually making money, which is generally going to be wherever your AI company is headquartered. Keep in mind that LLC regulations vary a little from state to state, so for instance if your AI venture is located in Wyoming, you’ll want to look into the specifics of setting up an LLC in Wyoming.
Choose the Right Agent
Every LLC needs to have a Registered Agent, which is simply someone tasked with receiving legal and tax correspondence on the company’s behalf. Some states allow owners to serve as their own Agents, but it’s much more common (and less hassle) to hire a third-party.
File and Pay
To officially register your LLC, you will need to file Articles of Organization with your state. This will also entail paying a small filing fee, which can vary depending on the state you’re in. Expect it to be anywhere from $20 to $300.
Get an EIN
Eventually, your LLC will need its own Employer Identification Number, or EIN. You can claim one for free from the IRS. Make sure you have it before you file taxes or process payroll.
Position Your AI Venture for Enduring Impact
Every business faces risk, and the AI ecosystem may be especially volatile. That’s what makes it so important to choose a legal structure that keeps risk at bay. One of the best ways to do this is by registering your business as an LLC. Take the necessary steps toward LLC formation today, establishing a firm foundation for lasting success in AI.