Business credit is a measure of a company’s responsibility concerning the way they use the money that lenders use in order to assess their trustworthiness for a loan. Having good business credit is vital for small businesses and entrepreneurs, as it directly determines one’s access to capital.
An inability to obtain capital can prove fatal for small businesses, with 53% of participants in the National Small Business Association’s survey reporting that they would be unable to grow or expand their business if capital availability was a problem. Even more worryingly, the same survey revealed that 32% believed the same problem would result in them reducing the number of employees.
One way in which businesses can improve their credit is by forming themselves as a limited liability company (or LLC for short). This corporate structure makes corporations appear more legitimate in the eyes of lenders and increases the chances they will extend them a loan.
The Effect of LLC Formation
Forming a corporation as an LLC disconnects its business assets from personal ones so as to protect members from being held personally responsible and pursuing the business’s debts and liabilities. On top of this, forming an LLC has positive benefits for business credit.
Firstly, it is often a requirement of most lenders that a business is established as a legal entity before they will consider extending them a loan or credit. Banks prefer businesses to have a legal entity in place because the protection of separating business from personal assets also extends to them as a lender as a shield against excessive risk.
Furthermore, should an owner of a business become embroiled in a lawsuit, and has formed his business as an LLC, the business’s assets and operations are far less likely to be impacted. Necessarily, the personal assets of the owner, such as his house, car, or personal bank accounts will also be protected on the off chance your business is engaged in a lawsuit or defaults on a debt.
How To Form an LLC
Select Your State
For small businesses and entrepreneurs, it is often recommended to form your LLC in the state in which you live and are planning to operate your business in. Businesses with a physical presence (i.e. stores, offices, etc.) that spans multiple states must register their company foreign LLC in all those states they are present.
Name Your LLC
When naming your business, the first step of forming an LLC is necessary to search your intended business’s name online to ensure your LLC name is unique and individual to you. On top of this, each state has naming guidelines that must be adhered by, some common ones include: your business name must contain “limited liability company” and cannot use specific restricted words (i.e. bank, attorney, etc.) which require additional licensing to be used as part of your LLC.
Copyright: TRUiC
Choose a Registered Agent
During their formation, most states will obligate LLCs to identify a registered agent. This is a person or business that handles official correspondence on behalf of your company; they are responsible for your LLC’s legal papers and summons as well as state filing notices. The registered agent is mandated to either be an occupant of the state your business is based in or a company that is permitted to operate in that state.
File Your LLC with the State
The final step to officially create an LLC is to file one’s formation documents with the business division of the state you intend to operate in – usually through the Secretary of State. These may also be referred to as Certificates of Formation or Organisation. These documents can be filled out online (or by mail) by the business owner themselves, though it is also common to turn to an LLC formation service to handle it on your behalf.
Create an LLC Operating Agreement
Whilst not necessary in order to create an LLC, it is highly recommended for businesses (especially small and new ones) to draft an operating agreement as it can prove extremely beneficial. This legal document lays out how the company’s ownership is structured as well as the roles of the member roles in the LLC.
Get an EIN
An Employer Identification Number (or EIN), acts as a business’s Social Security number. It is necessary in order to be able to hire employees and open a bank account in your business’s name.
For more information about how to build business credit, please refer to The Really Useful Information Company’s (TRUiC) website.