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How to Form an LLC: On Your Own or With a Professional
As opportunities emerge to own or operate a business, it’s wise to compare the features of each model and how these options blend with the corporation’s niche. Limited liability companies (LLCs) are managed as separate businesses and offer many advantages to small business owners who want to keep their personal dealings separately managed from their taxed business assets.
What is a Limited Liability Company (LLC)?
What is a Limited Liability Company? Limited liability companies (LLCs) are legally separate forms of business entities but different in many ways from corporations. Small-to-medium business owners use LLCs to create an alternative means of personal liability protection (rather than a typical corporation or partnership management role). The entity allows its owners and members to avoid other parties holding them personally responsible for the LLC’s actions and managed liabilities.
Who Should Look Into How to Form an LLC?
Formation flexibility allows the LLC’s members to enjoy complete liability protection in the way that’s most favorable for their framework and fees. This is part of why forming an LLC is a popular choice compared to a corporation or similar entity. An experienced team can help you start an LLC if you want a business managed as a distinct operation or put you in touch with an attorney.
Creating a formal business entity, such as forming an LLC, helps small business owners establish credibility as a managed organization. It lends far more clout to its reputation, much more so than partnerships or sole proprietorships. It is also easier to skip through the paperwork with an experienced tax attorney at the table, despite the fee.
The Benefits and Drawbacks of LLCs
When considering how to form an LLC, an experienced attorney or service like ours will refer you to the advantages of a well-managed entity with taxed assets of its own.
Advantages of LLCs
As a separate entity from its owners, a limited liability company (LLC) offers several benefits for small business owners when compared to a corporation:
- The organization shields each LLC member from personal liability for its actions. For example, it provides liability separation for members’ assets when creditors pursue business debts.
- As a business entity, the LLC can sign contracts, such as leases and loans. It can also file lawsuits.
- Limited liability companies provide flexible options for membership and management.
- Unlike a Subchapter (S) corporation, LLCs may include any number of members—the LLC members consist of individuals, trusts, corporations, or partnerships.
- Members of LLCs can choose to directly manage the company or have it managed by a team similar to the Board of Directors in corporations.
The founder of the LLC can act as its sole member and still enjoy tax and business liability benefits. States automatically rule that the LLC members are responsible for management unless the Articles of Organization LLC forms say otherwise. When the owners of an LLC need to make a decision, each LLC member has an equal say in the process.
Tax Benefits of LLCs
LLC pass-through taxation is another major drawcard that inspires business owners to create an LLC. When the entity chooses not to be taxed as an S corporation, it instead files tax returns as a business entity, and LLC owners include any business income on individual tax returns. The owners pay separate taxes on personal assets rather than paying taxes for the corporation and the shareholders’ income.
An LLC member can also elect to have the LLC taxed as a corporation to tax the profits at a business level. Depending on the state, the state LLC tax may not use the same qualifications as the IRS tax treatment.
Disadvantages of LLCs
Tax is not the only consideration in how to form an LLC. There are also some disadvantages:
- The small business owner starting an LLC has to pay an initial formation fee as well as ongoing fees in many states. It makes this choice more expensive than a general partnership or sole proprietorship.
- One example of an extra business expense is the annual state franchise tax, which charges LLCs for the ability to incorporate and transact business in a specific state. These also differ from state to state, making it necessary to check resources from the Secretary of State’s office.
- Transferring ownership or adding a new LLC member involves a more complicated process than other business types. It requires the approval of all LLC members.
However, state compliance and upkeep requirements are simpler for LLCs than for other business types.
How to Form an LLC: The Process
Forming an LLC requires few legal or residency restrictions. You can file most of the forms yourself or hire our inexpensive service or a pricier attorney to do it for you. Some services only require a state’s filing fee for forming an LLC.
If you are a small business owner seeking liability protection with few compliance requirements, LLC Formations advises following these steps to create an LLC.
Choose the State in Which You Form an LLC
Most business owners prefer forming an LLC in-state. Forming an LLC in the home state is not always the most favorable choice. However, an LLC owner will need to file a foreign qualification and other administrative costs in the home state.
Each state also has separate taxes, fees, and compliance requirements that may make it a more appealing location to start an LLC. Compare the advantages and disadvantages of each state if you plan to form an LLC that does business in more than one state or region.
Choose a Name for Your New Business
When you choose a name for your LLC, most states require it to be a unique LLC name that is not in use by another business entity or LLC in your state. The other guidelines include banning vulgar words, words that apply to specific business types, and affiliations with official government entities. Some states also reject names that are “deceptively similar” to an existing LLC in your state.
Most LLC naming guidelines require an LLC business designation in the company’s name. For example, the LLC name might end with LLC-related phrases such as “Limited Company” or “Limited Liability Company.”
State websites often include free search functions or mail options to check if a business name is available. Depending on the type of business your LLC will conduct, your attorney may have to check other databases for intellectual property infringements, such as the US Patent and Trademark Commission or the Department of Revenue.
The chosen LLC name is a significant portion of your business brand that should be easy to remember and spell. Potential business customers recognize and remember the perfect business name, so think about it carefully.
The first step in how to form an LLC is to request that the state approves the potential name officially, even if you are not ready to file other formation documents. Pay the small fee to reserve an LLC name for a limited time until you finish filing your Articles of Organization—it prevents other LLCs from taking the name before you complete the LLC formation.
Choose a Registered Agent
An LLC’s registered agent is a person or company that will act as the state contact point. The third-party receives documents, lawsuits, and other formal contacts on behalf of the LLC, forwarding them immediately.
A registered agent is vital in any LLC, providing proof of delivering and receiving sensitive documents. If you do not choose a registered agent, your LLC might garner fines or lose its reputable standing with your state. It could even dissolve if it misses important information or filing deadlines.
Typically, the registered agent of an LLC handles legal documents, including annual reports mailed by the Secretary of State or tax-related documents sent by the state’s taxation department. The agent also receives service of process documents, notifying the LLC that another party is filing a lawsuit against them. It also handles court documents, including subpoenas.
Some states allow a member to act as a registered agent, but using another company or individual is convenient. The registered agent must be available through all business hours to handle time-sensitive legal documents, restricting travel days or leave if you accept the appointment. Your residential address would also be publicly available and receive all important documents.
If your state does not require a hired registered agent to form an LLC, finding a registered agent is still easier. The benefits to be worth the effort, and it is common to choose a registered agent service or a qualified attorney as the registered agent.
Most states only require that a registered agent be a corporation that can do business in your state or an individual who is at least 18 years old and has a physical address in the state. PO boxes are ineligible addresses.
File the LLC Articles of Organization with Your State
The LLC Articles of Organization is also known as a Certificate of Organization or Certificate of Formation, depending on the state. It contains vital documents, listing basic information about your LLC.
Typically, your state will require that the Certificate of Organization form includes:
- your LLC’s business name and address,
- the registered agent’s name and address,
- the names of owners and members, and
- a description of the business you plan to conduct.
Each state has a form for your Certificate of Formation online with filing instructions from the Secretary of State. It is possible to write the LLC Articles of Organization yourself in the long form if it includes the necessary information. The details should include the signature of the person forming the LLC and the registered agent where applicable.
Your filing options for the Articles of Organization differ from state to state. These may include mail, fax, online, or in-person filing. You should carefully research the state’s required Articles of Organization filing procedures and state filing fees to minimize the risk of rejection.
It is the most time-consuming aspect when forming an LLC. The state’s processing times range from days to weeks, but some request a filing fee for faster processing.
When your Articles of Organization complete the state filing process, you will receive a state document as legal proof of your LLC’s formation. The confirmation enables you to apply for an EIN, open a bank account for your LLC, and perform other important business functions as the owner of a new entity.
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Create an LLC Operating Agreement
An LLC operating agreement is not required to register in every state, but it serves an important role in establishing the business structure of a limited liability company. It is crucial to have an official written form of your business operating agreement. It distinguishes the LLC’s assets from your personal assets, outlines operational standards, divides ownership, and more.
The operating agreement includes the roles and identities of each LLC member and owner in the business structure to define responsibilities clearly. For example, the management structure prevents arguments between business partners who disagree about proper internal procedures. It should outline the authorities of each member, required votes, the addition of other members, and more.
You risk the dissolution of your LLC if the operating agreement does not carefully describe procedures for situations, such as a member leaving. Any effective operating agreement should include guidelines that make regular procedures simple, including holding meetings or taking votes. If you are ever in a position where you can no longer manage the LLC, your operating agreement will also allow you to include parameters and opt-out of default provisions in the statute.
- Outlining distributions of business profits and losses will also prevent conflict. If your LLC does dissolve, for example, it is important to have predetermined procedures for the redistribution of the business assets.
- If you form an LLC as a sole proprietorship, your LLC operating agreement offers limited liability protection by designating your new company a separate business entity in court. It will shield your personal assets from creditors who pursue business debts.
Much of the LLC formation process is easy to complete with the help of an LLC formation service, but creating an operating agreement can be challenging. It might be worth having an experienced attorney review your operating agreement to ensure that your limited liability company has suitable management and legal framework. If you prepare for the cost, it is well worth it.
Acquire an EIN
An LLC Employer Identification Number (EIN) is a federal tax ID number that makes it easier to file taxes, open bank accounts, and hire employees for your limited liability company. The only type of business that does not benefit from a federal tax EIN is a sole proprietorship LLC (that has no other employees).
Your LLC’s EIN allows you to acquire licenses and permits for federal and state business compliance and perform business banking transactions. The LLC federal tax number also allows you to file taxes and perform other business transactions without using a Social Security Number, safeguarding your private information.
Filing for an LLC through the Internal Revenue Service is simple enough without an attorney. You can complete the application via mail or online. You only need to file Internal Revenue Service Form SS-4 and pay relevant fees to obtain an EIN, and the Internal Revenue Service website assigns your EIN immediately.
Secure Your Business Banking and LLC Finances
A new business EIN will let you establish the financial structure of your limited liability company by creating an official business bank account. It is not legally required to form an LLC, but it allows you to keep your business income and expenses separate from your personal finances, an important aspect of liability protection.
A separate business bank account makes it easier to handle the LLC’s finances and promotes the legitimacy of your business entity. Using your personal account to receive checks or make payments makes your LLC seem unprofessional. It also publicizes your personal information.
Before you begin other business activities when you start an LLC, set up accounting software or hire the services of a professional accountant. You will be able to accurately track expenses for the limited liability company while detecting discrepancies or issues immediately.
Business accounting software is accessible and keeps all your LLC financial information collated. These programs are easy enough for almost any LLC member to use to record vital tax information, such as receipts and ledgers. Different software also includes other organizational features, such as cataloging employee information or assisting with audits.
State Licenses and Permits
It’s crucial to be state-compliant when you start an LLC. Depending on the state, county, or municipality of the LLC, it could be subject to specific business requirements. Visit your state government’s online resources to find out about licenses and tax registrations for your members.
Find the appropriate forms to form an LLC, fill them in, and mailing them to the Secretary of State office to receive the official legal documents. The process usually takes less than a week after the state office receives your forms.
Some states have additional requirements like publishing a notice of intent, including Nebraska, New York, and Arizona. The notice appears in newspapers or media publications over several weeks before submitting the affidavit to your state’s filing agency with the appropriate filing fees. If you fail to publish the notice in county publications, the state may suspend the authority of your LLC to offer legal business services.
Other specific licenses and permits depending on the nature of your LLC. Hiring employees requires you to register with your state’s labor department. Selling taxable goods means that you need to apply for a sales tax identification number.
Taking care of these requirements before you finish forming an LLC will prevent unnecessary complications.
Why You Should Explore LLC Formations
While the multiple fees and forms can be daunting at first, learning how to form an LLC is a simple process. Whether relying on the services of a tax specialist or attorney or deciding to create the LLC Articles of Organization yourself, the process may vary. The only difference is the amount of work you put into the LLC formation process.
If you have the time and energy, you can learn how to form an LLC just by following the steps above. If not, LLC Formations offers comprehensive services and advice from experienced professionals in the field.
Keeping in Good Standing After Forming an LLC
After forming an LLC, you have to adhere to your state’s maintenance requirements to “stay in good standing.” The two most notable examples of these requirements are the annual report and the Certificate of Good Standing.
- An annual report allows the state to monitor your LLC’s finances, important changes, and basic information, such as the address and registered agent. It involves simple legal forms completed once a year. As with any LLC formation requirements, each state has its own procedures and filing fees for submitting an annual report.
- The Certificate of Good Standing is a way for the state to confirm your LLC is legitimate. The legal document is necessary for a wide variety of business procedures, including but not limited to:
- performing large banking transactions,
- selling the business, and
- registering the LLC in a foreign state.
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Register Your LLC to Operate in Another State
If you plan to do business in any state other than the one where you start your LLC, you have to register your LLC in each state, as well as appoint a registered agent. You must apply for authority and file it with the Secretary of State. Most states also require a Certificate of Good Standing from your limited liability company.
Each state requires foreign qualification if your LLC has a physical presence or employees in the state (or if it accepts orders in the state). However, different states have their own criteria for what qualifies your LLC as transacting business in another state, so our professionals recommend seeking legal advice.
Professional Filing Services
If you would like a professional to handle all of this for you we have created a list of the best business filing services available online:
Start a Business: LLC Formations
The process required to form and register a limited liability company (LLC) is simple. Once you learn how to form an LLC, you will need to decide whether to register it yourself or work with corporations that help create LLCs. It is mostly a matter of how much legwork you can afford to do while setting up an operation within or across state lines.
No matter the resources you use to register it, the new LLC is sure to be an essential element of your business’s future success. Feel free to call professional services like LLC Formations for more information today.