An LLC, or limited liability company, is an entity that allows the owners of the business to limit their liability in case of legal action against the trade or business debt. For example, if someone slips and falls at your place of work because you did not have non-slip mats on your flooring, they cannot sue you for medical costs.
How to Form an LLC in 7 Steps
Step 1: Choose a Name for Your LLC.
Your LLC name must contain one of the following: “limited company,” “limited liability company,” or an abbreviation for either, such as “Ltd.,” “LC,” or “LLC.” Your state may have additional naming requirements.
States charge between $20 and $100 of the filing fee for this reservation and will hold the name for up to 120 days while you work on completing your formation documents. You can check the availability of business names by searching online databases from your state’s Secretary of State website.
Step 2: Reserve a Name (optional)
You can reserve a name for your LLC with the Internal Revenue Service by filing Form SS-4, Application for Employer Identification Number. The IRS charges $75 and will secure the name of your LLC for 120 days.
Step 3: Choose a Registered Agent
Registered agent services are provided by an individual or business entity that must maintain a physical street address in the state where you form your LLC.
Your LLC’s legal correspondence will be forwarded to this address if you form your LLC with the Secretary of State. This person should be available during regular business hours to sign legal documents and accept service of process on behalf of your LLC.
You can choose yourself as your registered agent, which means you’ll receive any notices and other official mail at whatever home or office address you list for yourself when you file your LLC formation documents.
- must be located in the LLC’s home state
- must be available during regular business hours to sign legal papers and accept service of process on behalf of the LLC
- cannot be a person or entity that your LLC is currently doing business with (for example, you cannot use your accountant as your registered agent service if he also prepares your tax returns)
Step 4: Prepare LLC Operating Agreement
An LLC operating agreement includes the rules and direction for your own business. This document is similar to partnership operating agreements, except that LLC members manage their business proportion to ownership percentages interest in the business structure, and profits and losses are distributed accordingly.
Suppose you do not form an LLC operating agreement within 90 days of opening your business. In that case, your LLC will automatically revert to operating as a sole proprietor (more simply, whoever has formal control of the company owns it).
Operating without an agreement can be risky because you will not have much control over how much profit each LLC member claims or when they take money out of the LLC.
Step 5: File Organizational Paperwork With the State
Most states charge filing fees between $50 and $500 to file the necessary paperwork. Your state has forms you will need to complete, including LLC articles of organization (sometimes called a certificate of organization), an additional business name registration (if required by your state), and perhaps other LLC documents depending on the nature of your LLC.
Not all states require this step, but it is recommended to ensure that your business is adequately protected under state law.
Step 6: Obtain a Certificate from the State Tax Department
Your LLC must obtain a certificate from the state tax department to ensure it complies with state tax laws.
States charge between $50 and $500 for this document, which you will need for your company to open a bank account or apply for business licenses.
Step 7: Register to Do Business in the Other States (optional)
If you plan to do business in other states, you may have to inform them of your intent by filing additional paperwork with their Secretary of State.
You will also need to register for state taxes where you plan to operate. Most states charge between $50 and $500 for this process.
Pros and cons of starting an LLC
- Protects business owners from liability for business debts and judgments
- Provides a federal tax election advantage because members can elect to be taxed at the corporate level or as part of their tax return (if they expect to pay less in taxes this way)
- Allows the company itself to give members financial support, such as funding startup costs
- Keeps business transactions between employees and employees only; does not require third-party involvement.
- Provides a business structure for companies wishing to have members without the formality of stock ownership interests.
- Includes financial and legal risk if not adequately managed, as LLCs are run by their members (not managers)
- May have to pay taxes if the LLC is active in a specific industry
- Requires at least one person to be personally responsible for running your company
How much does forming an LLC cost?
The costs of forming an LLC vary depending on the state in which you file your paperwork. For example, it will cost approximately $125 to register in Florida, while in New York, it will be no less than$500 for this process. The total filing fee can range from a few hundred dollars to several thousand.
Business Structure Types
- Single-member LLC: This type of member-managed LLC is owned and operated by one person and does not require a certificate of organization. These LLCs work similarly to sole proprietorship but with the added major benefit of liability protection from business debts.
- Multi-member: For those who decide to choose this option for their business, an operating agreement needs to be drafted that outlines how much each member owns of the company and what percentage they will receive as part of any profits or losses
- Manager Managed LLC: This type of company provides more management structure than other business types because it allows the managers (the members) to make decisions independently from the shareholders (other members). The downside here is that sometimes managers can make irresponsible decisions on behalf of the company and run it into the ground.
- Series LLC: Operating under this type of LLC provides each series with its own set of identified property, but still keeps everything under one umbrella company
- Limited Liability Company (LLC): This option provides members with limited liability similar to a corporation’s shareholders
LLC vs. LLP
Limited Liability Partnership (LLP):
This type of company is best for professionals such as accountants and architects who wish to be protected from personal liability.
Limited Liability Company (LLC):
This option protects members from liability while allowing the LLC to give members financial support, keep transactions between employees and employees only; does not require third-party involvement, and provides a structure for companies wishing to have members without the formality of stock ownership.
This allows it to function as a corporation but still offers some of the benefits of a partnership
Choosing Between an LLC and LLP:
The choice here will depend on whether you want protection from litigation or if this is something you are comfortable with already. If your business operates in several states, an LLP may be the best option, as it reduces complications that could arise from having to file separate registration paperwork in each state.
LLC vs. S-corporation
S-corporations pay income taxes like normal corporations, with the exception of double taxation on profits. By default, S-corps are taxed as a business entity; however, by filing what is called an 83(b) election correctly, you can be taxed as if it were a sole proprietorship or partnership (single-member LLC) by the IRS.
This would give your company pass-through taxation and would be subject to your personal tax rates. On the other hand, LLCs are automatically considered “pass-through” entities and will save you money in self-employment taxes (Medicare and Social Security).
What to do after starting an LLC?
There may be several things to do after starting an LLC, such as perfecting the company’s business name and obtaining licenses or permits that apply to your industry. You will also need to open a bank account and figure out how much money you want each member of your LLC to contribute.
It is also important to elect someone as a managing partner, who has the same authority as a general partner in a partnership.
Acquire the necessary permits.
You will need to obtain business licenses in the states where you plan to do business, and this includes purchasing a seller’s permit from your state tax department.
In addition, you may also need zoning permits if your business is located in a special area, such as a historic district.
Settle on business insurance policies.
If you are starting a business, it is essential to have the right type of insurance. The cost of coverage will depend on what your company does and where you plan to operate.
If you choose to buy a company policy, it will definitely cost more, but there are various levels of coverage that can be purchased. In fact, some policies may provide protection from liability lawsuits and accidents.
Double-check the hiring laws.
LLC owners in all states must comply with local and federal laws concerning hiring. If you hire employees, they automatically become your responsibility, so it is important to pay workers’ compensation and understand the due process required for this type of situation.
Separate your personal assets from the company’s.
A new business can be a costly investment, so it is wise to keep owners’ personal assets separate from those of the LLC. In other words, if there is an issue with your company, you don’t want to have to settle this out of pocket because you failed to comply with legal requests for information about your assets.
Open business bank accounts.
Small business owners will need several bank accounts to keep everything organized.
If you plan on hiring employees or receive any other type of income, it is important to open a separate account for each source. This way, everything can be easily tracked and managed throughout the year.
Apply for an EIN and Review Tax Requirements.
You will need an employee identification number (EIN) if you hire employees or have a payroll. You can acquire this from the IRS website, by mail, or by phone. In addition, the company may be required to pay self-employment tax purposes and other types of business-related taxes.
The amount due depends on how much you earn through your LLC and what type of filing status you choose for yourself during tax season.
Unlike a corporation, an LLC, as a pass-through entity, does not pay taxes on its own earnings. Instead, the profits are allocated to each owner according to his or her stake in the company.
When you file your personal taxes, these amounts are then listed as part of your taxable income – but only up to the amount that was taken out for business purposes. This is known as pass-through taxation, and it can help reduce the combined tax burden (business and personal) of pass-through entities by quite a bit.
Many states require companies to pay sales taxes on any products they sell. If you plan to sell your product in other states, it will be important to learn how different areas handle this type of tax implications and what registrations you need to obtain beforehand.
Tax on Income
Income tax is a very important part of being a business owner. If your LLC makes at least $400 per year, you will have to file a federal income tax return by April 15th.
This applies even if the company has not started earning any money as long as it was established as a for-profit entity. In some cases, state or local government agency will send out separate tax returns as well.
Do I need a lawyer to form an LLC?
While you can create an LLC with the help of a “self-help” book, it’s always best to have legal advice before starting any business.
A lawyer can explain your state laws, advise on certain contracts and tell you how these rules might affect your LLC in the future. You may even want to hire a professional tax advisor or accountant if you are not familiar with this area of law.
In most states, LLCs must file annual reports with the Secretary of State. Your accountant can help you determine the exact due dates and steps for making this filing.
Annual meetings must take place as well. Failure to meet this requirement may result in a penalty or loss of your entity status. You must follow your state’s LLC laws and submit the appropriate forms every year before the due date, according to your company records book.
If you cannot hold an official meeting for some reason, it is sufficient to request a written resolution from each member regarding any important decisions made throughout the year.
Some states require annual meetings whether you want them or not! This can be inconvenient if you are short on time but still, wish to maintain full control over your company and its assets. In other words, check with your local Secretary of State before you start planning those “no-notice” holidays!
Real estate investing
Most real estate investors choose to use an LLC because of how it protects them from legal liability. Also, you will be able to claim all rental income (and expenses) on your personal tax return, whereas corporations may have restrictions on what percentage of the company’s income can go toward individual benefits.
Finally, the corporate tax rate for C-corps is roughly 40%, compared with less than half that for single-member LLCs.
The information in this article was intended to provide a general idea of the steps required in order to form your own LLC. However, it is best to seek assistance from an experienced professional who specializes in business formation laws before attempting any type of action.
This objective will help ensure that your company meets all local and federal requirements, which can significantly simplify the entire process.