How to Form an LLC

It’s really easy to set up a Limited Liability Company (LLC) and it won’t cost you much at all. Read on to find out the key steps you must take if you are ready to start your own LLC.

1. Choose a State

The first step is to choose where you want to set up your LLC. It’s usually easier to start an LLC in the state where you live and plan to do business, but you can also opt to set up an LLC in a different state, to take advantage of business-friendly legislation. Bear in mind also that if you plan on conducting business in multiple states, you will need to register the business in all of them. 

2. Create a Name for Your LLC

Your new LLC needs a name. Pick a name that best suits your business but adhere to the rules of your state. For example, you could make your LLC ‘ Brown Construction LLC’ but you are not allowed to use any names that might imply your company is a government agency, such as ‘FBI Investigations LLC’.

Always check there are no companies with a similar name in your state, as it will make things confusing for your customers. 

If you’re stuck for inspiration, try using a business name generator to see what it comes up with. This one also checks whether the domain name is free, which is handy.

Important: This is a good time to check if your proposed business name is available with a domain name (this may affect your choice). You can check with domain.com.

3. Find a Registered Agent

Registered agents can be people of businesses. Their job is to deal with the legal paperwork on your behalf. They are the recipients of documentation, such as summons and filings, which then they forward on to you. You’ll need to appoint a registered agent in the state where you set up your LLC. 

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4. File Formation Documents with the State 

The next step is to file the Articles of Organization, also known as the Formation Document, with the state. Before you take this step, consider what type of company structure you need. Do you want the company to be managed by members or managers? Both structures have their pros and cons in terms of who makes decisions, so give this a lot of thought. 

5. LLC Operating Agreements

The operating agreement outlines the ownership structure of the LLC. Many states don’t require one, but it makes sense to create one anyway. In simple terms, the operating agreement states when the company was set up, its management structure, where the capital originated from, how profits and losses are distributed, the process for adding and removing members or transferring their shares, and how the LLC can be dissolved. 

6. EINs

Finally, your new LLC will need an EIN, which is an employer identification number. This identifies the LLC for tax purposes and is needed if you want to open a business bank account or hire employees. You can apply for an EIN via the IRS website or by mail, and it’s free. 

There are many other important steps that follow once you have set up an LLC, so make sure you consult a professional advisor.

How Do You Form an LLC? Things You Should Know

A Limited Liability Company (LLC) is a good way to enter the business world while protecting your assets and streamlining certain aspects of your taxes. It does come with a few caveats that require your attention, but it’s generally a simple and straightforward way of setting things up. For this reason, it’s one of the most popular business forms among small business owners. Let’s have a look at the requirements for starting an LLC, and how the process works overall.

What Is an LLC?

LLC stands for “Limited Liability Company”, and as the name implies, it offers the benefit of minimizing your personal liability for business decisions. It also makes taxation somewhat simpler, as nothing is taxed on the business level, and taxes are instead passed on to the individuals involved in the organization.

This doesn’t mean that you don’t have to deal with any tax paperwork though. If the company has more than one owner, you’re still required to fill out a tax return for the company itself. Afterward, the incomes or losses reported on that tax return are transferred to the owners, who have to deal with them with their own personal accounts. Tax is also paid out of the personal accounts of the business owners. 

Advantages of an LLC

There are several major advantages to forming an LLC over other business forms. For most people’s needs, the advantages should definitely weigh more than any downsides associated with the LLC.

  • Liability: One of the main benefits of an LLC is the limited liability that it provides – which is also the basis for the entity’s name in the first place. All members of an LLC (the legal term for its owners) are shielded from personal liability from their involvement in the business. This means that members typically can’t be held personally liable for any debts or expenses – though there are some exceptions to this. 
  • Flexible options: Various legal entities are allowed to be members of an LLC, not just individuals. This also includes partnerships, trusts, and corporations. An LLC can also be managed by as many – or as few members – as necessary. This is a clear advantage over, for example, S corporations, which have much more severe restrictions in place for ownership.
  • Advanced management: Unlike a corporation – which is required to be managed by a board of directors – an LLC can be managed either by its members, or by a specifically appointed management group.
  • Streamlined taxes: Taxation is much more straightforward with an LLC compared to other legal forms. The LLC itself usually does not pay any taxes, and instead passes them down to its members. Members are then required to handle their taxes on an individual level, filling out tax returns for their income from the LLC (and/or for any associated losses).
  • Better market representation: An LLC immediately carries some weight of legitimacy with it, which can be important for a newly founded company trying to get off the ground as quickly as possible.
  • Compliance: LLCs are required to comply with fewer regulations, and the legal side of managing an LLC tends to be much simpler than in other legal forms.

Downsides of an LLC

Of course, an LLC doesn’t just bring advantages to the table. There are also some downsides to consider, and it’s important to know what you’re dealing with before setting one up. 

  • Cost: You have to pay an initial fee to form an LLC, and there are usually ongoing fees as well. This can make an LLC a costlier option compared to other business forms, especially for smaller companies with more limited resources.
  • Changing owners: It’s not as easy to transfer the ownership of an LLC as it is with a corporation, and you have to plan ahead for that. This can sometimes put you in very tricky legal situations, requiring you to pay careful attention to the legal requirements that you will be required to comply with.

LLC Compared to Other Business Structures

It’s important to know how an LLC compares to other business structures. There are some common points that can be used to compare it to an S corporation and certain other legal forms.

LLC vs S Corporation: Both an LLC and an S corporation offer the benefit of pass-through taxation, but an LLC tends to be more flexible when it comes to splitting the profits among the different owners. LLCs are also more versatile in terms of membership interest.

LLC vs Partnership/Sole Proprietorship: Comparing an LLC to a partnership or sole proprietorship is more complex. The main advantage of an LLC compared to those business types lies in the liability implications tied to it – but it goes beyond that. If a partnership or sole proprietorship is on the table for the formation of your business, make sure you understand the implications behind them very well.

LLC FAQ

What Is the Paperwork Needed to Start an LLC?

First and most importantly, you need to prepare a Certificate of Organization and file it with your state. This is also the point where you pay any initial filing fees. If you’re filing through a third party, then the initial paperwork should be handled by them entirely.

Who Is Allowed to Form an LLC?

Anyone can form an LLC with some minimal requirements. You need to be of legal age, although some states vary slightly in their requirements in this regard – some are a bit more lenient. Other than that, there are no notable fundamental requirements for starting an LLC.

Is Legal Assistance Required for Forming an LLC?

An LLC can be formed without professional legal assistance, and you can handle pretty much all of the paperwork on your own. However, this means that you will be solely responsible for understanding the full implications of what you are doing. You will have to do your own research on filling out the paperwork and other important points, so set aside some more time for that.

How Do I Choose a Name for My LLC?

It may sound like a trivial point, but choosing the right name for your company can actually matter quite a lot. It has to be professional and make a good impression of the vision you have for your business. There are also some advantages to choosing a short, simple to remember name. For example, this can make it easier to find a good domain name. Get a few ideas down and look them up in your corresponding registry to ensure that they are not taken. You should not invest anything into a chosen name before verifying that you are allowed to use it.

Is There a Requirement for a Minimum Number of Members?

One person is enough to form an LLC and qualify for the pass-through taxation rules. However, LLCs with a single member may be subject to some slightly different taxation rules in some areas. It’s important to verify that before committing to an LLC under your specific circumstances.

How Do Taxes Work?

LLC taxation is similar to that of partnerships, in the sense that they both rely on pass-through taxation. You may be required to file a tax return under certain conditions, like when you have multiple members in your LLC. This doesn’t change the way taxes are handled though, as they are always passed down to the LLC’s members on a personal level.

 

There is also an option to tax an LLC like a corporation at the business level, but this has to be explored in detail for each specific case.

 

You may be required to pay franchise taxes for your LLC as well. This varies from state to state, but there are typically some minimum tax levels that you need to cover in order to maintain your LLC’s existence on an annual basis. This applies even when you haven’t made any profits in most cases. 

How Is an LLC Structured?

LLCs are entirely owned by their members. It’s the same setup as partners in partnerships, or shareholders in corporations – although that varies a bit according to how the LLC is managed. If the LLC relies on managers, then a single member will be more similar to shareholders. On the other hand, members are closer to partners when an LLC does not utilize managers. It all depends on the initial setup of the organization, which is why it’s so important to explore those details.

How Does the Management of an LLC Work?

LLCs are either managed by their owners or by specifically appointed managers. An LLC managed by members is very similar to partnerships, where each member gets equal rights in determining the direction of the organization as a whole. Alternatively, a manager may be elected to handle all operations, which then makes the structure similar to the board of directors found in corporations.

 By default, an LLC is managed by its members. Managers have to be specifically selected in the initial formation if they are to direct the development of the organization. 

What Is a “Publication Requirement”?

In some states, you may be required to formally announce that you have formed an LLC in a predetermined manner. Most often this is done by means of a newspaper publication, although there are different options in some states. In any case, the basic idea is that the public must be notified of the formation and existence of the new LLC.

 You don’t always have to publish that notice immediately. There are various deadlines for that, and in some cases, you may have up to four months to make the publication. Even if this seems like a minor formality though, make sure that you don’t ignore it.

Do I Need a Registered Agent?

You must appoint a registered agent when founding an LLC. This is another formal requirement that can be handled by the main owner of the company, but you also have alternative options for approaching it which you should explore.

How Do I Make Sure That My LLC Always Has a Registered Agent?

Using a third-party service is typically the best way to ensure that you have a registered agent at all times and that you’re in full compliance. Professional services can handle most of the heavy lifting in this area, and you’ll just have to maintain your membership fees and pay attention to any specific ongoing requirements.

How Do I Start Setting Up an LLC?

Once you’ve made the decision to form an LLC, you have to file Articles of Organization forms and pay the appropriate fees. It’s also a good idea to hold an initial organizational meeting if you’re going to be running the LLC with other people, or plan to have it managed by appointed managers. This will give everyone an opportunity to align their goals and reach an agreement on the operation of the company.

How Fast Will I Get My Initial Paperwork?

Forming an LLC can take some time, and the main bottleneck typically lies in the response time of government institutions. Some paperwork is processed very quickly, and you’ll have to only wait a couple of days to get a response. But in other cases, it can take significantly longer than that, and certain parts of the process can actually require you to wait for weeks. Make sure to plan ahead for that appropriately to avoid any unpleasant surprises.

What Is a Single-Member LLC?

A single-member LLC is a special type of LLC in the eyes of the IRS, but it still comes with all the special benefits regarding liability that an LLC normally provides. Taxes are still carried over to your personal accounts and have to be paid out by you.

What Is an LLC Operating Agreement?

An operating agreement lays out all management guidelines for the LLC. It’s prepared by the LLC’s members in the first meeting of the organization.

What Are the Advantages of an LLC?

The main benefits of an LLC include limited personal liability and streamlined handling of taxes.

What Is a PLLC (Professional LLC)?

A PLLC (Professional LLC) is a specifically formed LLC set up to provide professional services in sectors where state licensing is required.

How Do I Get an EIN for an LLC?

A business can apply for an EIN (a federal tax ID) by preparing form SS-4 and submitting it to the IRS.

What Are the Costs of Setting Up an LLC?

The specific fees and costs associated with setting up an LLC vary from state to state.

Related: Northwest registered agent review

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