One of the most important steps in establishing your business is to set up your limited liability company (LLC) correctly. Plus, an LLC can protect your business from liability, among other things. A limited liability company (LLC) is a popular choice among small business owners due to the liability protection, management freedom, and tax benefits this form of business organization can provide. TechBrains tells you how to start an LLC in this guide.
What’s An LLC?
Business owners in the United States can elect an LLC type of legal organization to run their company. Creating an LLC saves a person or group’s assets in case they get into trouble with the law or go bankrupt. Different businesses work in different ways, so this gives taxation options that are adjustable. While others may be taxed as corporations, some may elect to be taxed as sole proprietorships instead. To find the best option for your LLC, talk to a tax professional.
How To Set Up An LLC?
Start an LLC today by following these seven steps. Each state has its own laws and procedures. You can look through our state LLC creation guides to find information that is special to your state.
1. Choose A Name For Your Business
When naming your business, marketing may come to mind. Your business name must also adhere to state law standards, even though it’s crucial to choose the right name for branding reasons. Most state rules prohibit you from choosing a business name that another company in your state is already using.
The majority of states also forbid the use of certain words that might suggest you work in a particular business, like insurance or banks. Most likely, you’ll need to add “LLC” or “limited liability company” to the end of your business name. By checking the website of the state office in charge of business filings (typically the Secretary of State), you can review your state’s LLC naming requirements and find out if the name you want is available.
2. Choose A Registered Agent
All fifty states require LLCs to have a registered agent [RA]. On behalf of the LLC, a listed agent gets official or legal documents (like subpoenas). The registered person then gives these documents to the LLC after receiving them.
A listed person can be anyone over the age of 18, and you can name yourself or someone you hire. The person must, however, be available at a home address in your state during regular business hours. You can also designate a company that provides registered agent services. Of course, there is a cost associated with this; registered agents may cost more than $100 plus an annual fee.
3. Get A Copy Of The Papers Your State Needs To Form An LLC
File a document with the state office that handles business forms in your state to establish your LLC as a legal company. This document is known as the Articles of Organization in most states, but some states use a different name, like a Certificate of Formation. You can use a form from each state. Visit the website where you previously looked up business names to locate the form for your state.
4. Fill Out The Articles Of Organization Form For The LLC
Each state makes a list of the exact steps and standards people need to follow to form an LLC. You must provide the following basic information on the form.
- Business name.
- This is the address of your main business.
- What the business is for.
- We will manage your LLC in a specific manner.
- The listed agent provides their contact details and, in certain states, their signature.
- How long will the LLC last?
One or more business owners or leaders must sign the form after these steps are complete.
Some states, such as Nebraska and New York, require you to place an advertisement in the press announcing your intention to register your LLC. You must complete this step prior to filing the articles of organization.
5. Put The Articles Of Organization In A Bank
Before sending your articles of organization to your state, make sure they are correct. The state in which you are forming your business will determine the filing fee you must pay.
Once the state accepts your forming documents, it will issue you a certificate to officially register your LLC. Setting up a business bank account and obtaining a tax ID number are two other important things you should do with it.
6. Create A Business Agreement
A running agreement contains the details of the financial, legal, and management rights of all LLC members. It can say more specific things like how income will be split, how members can leave the LLC, and who gives money to the business. In essence, it should contain all the necessary information about how your LLC operates. Many states do not require a working agreement, but that doesn’t mean you shouldn’t write one.
To ensure that everyone understands their rights and responsibilities, LLCs with more than one member or partner should establish one. Even business owners who operate independently can benefit from writing down the details. One option is to write your own running agreement, which is especially useful for LLCs with only one member. To begin with, there are numerous free models available online. It may be well worth the money to hire a skilled attorney for more complicated cases, like LLCs with multiple owners.
7. Keep Your LLC Active
The first step is to establish your LLC. After forming your business, you need to verify its compliance with the state. Again, check your state’s business filing page for the latest instructions. There may be a fee you have to pay every year to file a yearly report with updated information about your LLC.
Creating An LLC: Other Important Steps
In addition to learning how to form an LLC, there are a few other important details to take care of. These details either help the new entity succeed or are required for running your business.
Get Licenses And Permits For Your Business
You will probably need to complete forms and pay fees connected to business licenses and permits in addition to the documents required for establishing your LLC. This information is probably available at the same office or on the website under business forms and fee plans.
Verify the licenses and fees your business needs to properly run in your state. Remember important dates, because you will probably need to renew your license or pass from time to time. Should you fail to meet the renewal requirements, your LLC may lose its formal standing as a business.
Get An Employer Identification Number (EIN)
Getting an EIN is necessary for anyone who wants to start an LLC. For starters, it’s a beneficial way to keep your business assets and funds separate from your own. When starting a business account for your LLC, banks typically require an EIN. Additionally, some businesses require an EIN to operate. When you first set up your new company, you should get your EIN.
Separate Your Personal And Business Assets
You can take steps to separate your personal assets from those associated with your business, as previously mentioned. Most of the time, this process starts with getting an EIN and a business bank account.
One thing that LLC owners and members worry about is how to pay themselves. Typically, this entails deducting funds from the business account associated with your LLC. We must refer to this retreat as an “owner’s draw.” You can treat yourself like a business employee and escape the problems that come up when you use company money for personal things.
Sign Up For Your Company In Other States
There is no restriction on the states in which you can register your business. It’s also not necessary to live in the state where you form your domestic or in-state company. Having a listed person in another state lets you start a foreign business.
Establishing your business in a different state is required before creating a foreign LLC. For example, if you formed your LLC in Delaware but now want to do business in Texas, you need to send Form 304, which is an Application for Registration of a Foreign Limited Liability Company, to the Texas Secretary of State. In order to register your business in other states, you may also need to provide a certificate of excellent standing and extra documents.
Why Form An LLC?
Many entrepreneurs and groups that want to start a new business find LLCs useful. People often elect to form LLCs for a variety of reasons.
Low Cost To Start Up
The cost of establishing and running an LLC is typically lower than that of a corporation. The fees are less than $100 in some states. For those who want to start a company but don’t want to spend a lot of money, LLCs are a beneficial business format.
Benefits Related To Taxes
LLCs are unique in that they receive treatment as a pass-through entity and can claim their business assets on personal taxes. This is due to the separation of business assets from personal funds. Many LLC owners prefer this option due to the potential for double taxation. You can treat LLCs as a sole proprietorship, partnership, C-corp, or S-corp for tax purposes. Learn more about the tax perks of an LLC.
Protection From Liability
Running an LLC provides members and owners with liability protection, as the name suggests. For example, properly designating the business’s assets protects members’ assets in the event of an attack on the company.
It’s not difficult to learn how to start an LLC. There are businesses that can assist you with the paperwork and even handle yearly tasks such as filing annual reports on your behalf.
Create An LLC Benefits
Instead of running your business as a sole proprietorship, general partnership, or corporation, the advantages of setting up an LLC typically outweigh the drawbacks.
Limited Liability
The term “Members” protects LLC owners from personal liability for the LLC’s and its other members’ actions. Creditors cannot seize the owners’ personal assets, such as their home or savings accounts, to force them to settle their business debts. Whether a business operates as a sole proprietorship or a general partnership, the owners can use their personal assets to settle its bills.
Note: An LLC or a corporation may lose its limited liability. This is known as “piercing the veil.”
Flexible Membership
LLC members can be individuals, partnerships, trusts, or corporations, and there is no limit. S corporations, which opt for taxation as pass-through entities under Subchapter S of the Internal Revenue Code, have a maximum number of shareholders.
Management Structure
Members (owners) of an LLC can run the business themselves or elect a management group to do so. A board of directors manages corporations, unlike shareholders. When members run an LLC (a “member-managed” management organization), owners are in charge of running the day-to-day business. When the LLC hires managers, it functions similarly to a corporation, with directors and officers managing the business instead of the owners (shareholders). This is called “manager-managed” management.
Pass-through Taxation
At the business entity level, LLCs typically do not pay taxes. The business’s income or loss “passes through” to the owners and appears on their personal tax forms. Each person pays any due taxes. If a company cannot pay taxes as a S corporation, we tax it as a business unit and tax the income it distributes to its shareholders. We call it a “C corporation” due to its taxation under IRS Subchapter C of the IRC. The creation of this type of corporation occurs during the organization process.
Heightened Credibility
Starting an LLC may help a new business establish credibility more than running it as a sole proprietorship or partnership.
Limited Compliance Requirements
LLCs have fewer ongoing formalities and requirements set by the state than corporations, whether they are taxed as S corporations or C corporations.
Create An LLC Disadvantage
Creating an LLC has its drawbacks. In many situations, though, the pros are greater than the cons.
Cost
Compared to a sole proprietorship or general partnership, an LLC typically costs more to form and keep. States charge a creation fee. Many states also impose ongoing fees, such as yearly reports and/or license tax fees. You can check with the office of your Secretary of State.
Transferable Ownership
It is usually harder to change who owns an LLC than it is to sell a corporation. Owners of corporations can sell their shares to increase ownership, and shareholders can also sell their shares to others, unless a shareholder agreement specifies otherwise. When it comes to LLCs, unless all members agree otherwise, all members must agree to add new members or change the amount of ownership of current members.
Compliance Obligations
Despite having fewer requirements than corporations or sole proprietorships, LLCs have more ongoing requirements than general partnerships.
Consider The Following:
Final Words:
It looks like 2024 will be one of the best years for small business owners in recent memory. This is because new technologies and tools are becoming easier to get, and small, flexible business ideas are becoming more and more valuable. Fortunately, starting an LLC requires little more than a brilliant idea, some research, and the right support network for entrepreneurs. Have you been thinking about starting your own LLC? Now is the ideal moment to select a name, prepare your articles of organization, and commence operations.