LLC Formation 101: 5 Considerations
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A limited liability company (LLC) is a type of United States business structure, or “entity,” that governs factors such as taxation, legal regulation and personal liabilities within a company. It’s considered to be a hybrid of both a corporation and partnership, adopting aspects of each: liability perks from a corporation and tax perks from a partnership.
The formation of an LLC isn’t considered to be too difficult, and provides the owner with additional safeguarding and management benefits that they’d otherwise lack. It also provides additional flexibility and reduces administrative duties such as record keeping and regular meetings. There are however, several things to consider before creating one.
1. Understand what is involved in an LLC
It is important to consider what is actually involved with an LLC before forming one. This will help you understand what to expect and what is required of you.
Some things to consider include:
- Statutory requirements must be followed.
- Proper registrations are essential if your LLC is formed under another state’s law.
- LLC’s have a flow-through tax entity structure.
- LLCs are not taxed directly by the IRS.
- LLC’s liabilities are separate from the company’s owner.
- Members of LLCs have a lot of flexibility in comparison to other business structures.
- Members are required to pay certain taxes as they are considered self-employed.
- There are companies, such as Incfile, that offer LLC formation guidance and help.
2. Select where you’d like to form your LLC
When deciding where to form your LLC, think about where you’re going to be doing most of your business. Many businesses choose to form their LLCs in Delaware, because of its long tradition of corporate law, but what makes sense for you will depend on your business. This is especially important if you’ll be operating in multiple states.
If this is the case, consider that you may be required to abide by each state’s individual LLC laws. That might mean filing an “article of organization” (which we will cover shortly) in each state. If you’re operating in another state, you may be considered a “foreign LLC,” and you’ll need to register as is required by state law. Failure to do so may result in harsh legal and financial penalties.
3. Choose your LLC name, registered agent and operating agreement
This step is essential and allows you to put on your creative cap and choose an engaging, distinguished, and marketable business name. There are however, state-specific rules when it comes to naming your company. The actual term “limited liability company” or the abbreviated “LLC” are often a pre-requisite within your title, whereas, other specific phrases such as “lawyer” or “bank” may require special additional approval.
After you’ve chosen a name, it is vital to check its availability, something that can easily be done online. You’ll also need to find a registered agent. This person will be responsible for accepting any legal documents on behalf of your company. From there, while not required in all states, an operating agreement is recommended in order to establish how your LLC will be run, and the culture of your company, while addressing member’s legal rights.
4. File Articles of Organization
In order to successfully form your LLC, it is essential to file your “Articles of Organization” with the secretary of state. This document usually requires specific details about your company, including its name, address duration and purpose.
There is also a filing fee that must be considered, generally around $100. Filing this document can either be done online or via mail.
5. Obtain proper licenses, permits and identification
Obtaining the correct legal licenses and other state requirements is another important thing to consider in the formation of your LLC. Requirements may include:
- Employee identification number (EIN)/ federal tax ID number (required for opening a business bank account and hiring employees)
- Register for state-specific taxes
- Business licenses
- Sales/employer taxes
- Sellers/zoning permits
There are many perks to starting up a limited liability company in the United States. Notable benefits include the separation of company and personal assets, the flexibility of management, as well as the flow-through taxation benefits.
It is, however, vital to understand how LLCs operate and the various legal obligations that must be met during the formation. These may include meeting specific guidelines when creating a company name, applying for the correct licenses and permits, allocating a registered agent, and, of course, ensuring you follow each individual state’s rules.