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Forming an LLC in North Carolina
An LLC is a hybrid business entity with the benefits from sole proprietorships, partnerships and corporations. Some of these benefits include ease of management, pass-through taxation and personal liability protection. Before we dive into the filing requirements of an LLC, here’s a quick description of other business entities and how they measure up.
A sole proprietorship is the simplest of all business structures and can be dissolved the fastest. A sole proprietor ship is run by a single person for his or her own benefits. The sole proprietor can also be known as a consultant, a freelancer or an independent contractor. As a single-owner operation, a sole proprietorship does not exist apart from the owner and the owner’s resources. All liabilities arising from the operation of the business will fall upon the owner. If the owner dies, the organization will cease to exist.
Sole proprietorships have minimal creation fees and require very little paperwork to launch. However, owners of a sole proprietorship will need to set aside a sizable chunk of money from their net income to pay for the taxes that apply to such an operation. Sole proprietorships are also known as single-member LLCs and are taxed on Schedule C. For more information check out our main page.
A corporation is a legally recognized entity that operates according to state law. There are several different kinds of corporations. Most corporations come with an Inc. at the end of the company name and are the most common for of corporate entity. Owners receive limited protection from liabilities and are not held accountable for other owners’ actions.
Stockholders in a corporation are also protected from liability. Both stockholders and employees can take advantage of certain benefits of a corporation, including health insurance and tax deductions. Also, both the owners and the business itself can take advantage of lower tax payments by porting profits among each member of the business.
Non-profit corporations, on the other hand, do not pay any taxes at all for any money they receive for charity purposes. Donors to a not-profit organization can deduct any donations from their personal income taxes. Also, nonprofit organizations can benefit from exempt status in regards to state and federal taxes. These organizations are also known as exempt organizations.
C corporations are independent legal and tax entities from the owners. There is no limit to potential shareholders. C corporations also make a distinction between business debts and personal assets. If someone sues your business, your personal assets will still remain intact and cannot be accessed to pay legal fees or any resulting compensation to the plaintiff(s). C corporations are not eligible for pass-through taxation and are required to pay double on dividends and business profits. By law, a C corporation is required to hold a yearly meeting and to record meeting minutes.
S corporations are created for smaller companies to allow them to take advantage of specific tax advantages, as long as specific IRS requirements are met. The S corporation operates in the same manner as a C corporation. However, these business entities face the same amount of taxation as a partnership. S corporations have limited protections compared to C corporations, but they have full control over how much profit is given to each member of the corporation.
S corporations must have at least one stockholder and may not exceed 100 stockholders. An S corporation owner can also benefit from special protections from liability from debts or judgements. Even though the shareholders of an S corporation have the right to keep all or only a portion of the net income of the business, all generated net income is calculated as income for the business. Owners have the option to share net profits while offsetting income by reporting a loss on income tax forms.
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Double taxation takes place when the income or profits of a business are taxed twice on both the corporate level and the personal level. Although this can seem to be unfair, it is legal due to the nature of a corporation. A corporation is seen as an entity separate from the owners. As a result, the corporation is taxed on its income or profits, and the owners are taxed on their income or profits.
One argument in favor of double taxation is that it prevents wealthy persons from avoiding tax payments by paying their employees from company dividends gained through owning stock. Other arguments against double taxation argue that, because the corporate income rate in the United States is the highest in the world at nearly 40 percent, double taxation inhibits the growth of the economy and encourages companies to finance any desired investments by borrowing money. Double taxation also reduces the amount of money a corporation can have in savings, causes debt to be prioritized over equity and encourages businesses to avoid corporate structures. Many other countries, including Australia, have rewritten their tax codes to avoid double taxation.
To avoid paying double taxation, some business owners do not pay their shareholders with dividends. Although this cuts down on the income your shareholders receive, you will not be taxed on it. Some businesses choose to only operate in countries that have treaties signed to avoid double taxation on their corporations and personal income. Countries can do this by not taxing income from another country if the earned income has already been taxed once. In these situations, tax credits are also an option. If you are a resident of another country and are living in the United States, you may also have the opportunity to avoid double taxation if your income is below a certain threshold.
Double taxation usually does not occur internationally as the main taxing country might exempt foreign-source income from taxes. There have been many international tax treaties signed to avoid double taxation between nations. Countries that have these treaties with other nations include the European Union, Germany, Cyprus, India, Australia and the United States.
Living and working in two different states within a single year as a corporation can lead to double taxation in and of itself. Keeping track of how much money you earned in each state during each month of the year will allow you to make accurate reports to the taxing entities of each state when you file your taxes for the year’s end.
How can you avoid double taxation with your C or S corporation? Here are some tips you can follow.
Do not pay dividends to shareholders. Dividends are defined as payment by a corporation to its shareholders as a distribution of profits. If you pay shares to your employees, increase their salaries to compensate for the lack of dividend payments. In the event that you choose to pay dividends, consider becoming an S corporation rather than a C corporation. S corporations do not pay federal taxes and are only required to pay taxes on the dividends they pay. You could also consider forming your business as an LLC instead of an S or C corporation.
Name yourself as an employee of your own company. As a salaried member of your S or C corporation, you might need to pay a higher personal income tax. However, the salary you take will count as a deductible for the corporation’s expenses and will offset the increase in personal income tax.
Keep track of any income earned in different states and other countries. Making accurate reports to the correct tax agencies will limit your chances of receiving unpleasant audits or other penalties. You might want to avoid doing business in countries that do not have tax treaties to avoid double taxation.
Add your family members to your payroll. If you have maxed out on what you can reasonably take as a salary from your business, you can add members of your family to your payroll. Commonly referred to as income splitting, this technique will only work if the family members are legitimate employees.
Lease equipment that you own to your business. Leasing equipment that you own to your company is a widely-known practice that allows you to legally transfer money with minimal tax burdens.
Partnerships allow the individual members of the business to deduct income according to their shares in the partnership. However, partnerships are held liable for any lawsuits and judgments against the company and do not have the separation between the company and personal assets. Partnerships are easy to operate and do not have the same strict requirements of corporations.
General partnerships are an agreement between two or more individuals who are in pursuit of a profit. There are no fees to create such an organization. A general partnership allows the partners more flexibility in operating their business and can help them expand more quickly. Each member of a partnership is entitled to all profits and all liabilities attributed to the business. Each partner will also contribute to the business in the form of labor, skill or financial resources. Owners can report net business losses on their personal income tax forms and can host money raising events without giving up their share in the partnership.
Limited partnerships provide limited personal liability against any debts absorbed on the funds put into the organization. Limited partners are attractive to investors as each person of the partnership is only responsible for his or her portion of the business. Each partner must file on their own to take advantage of limited partner status. Unlike a general partnership, where all owners must remain engaged in the business to keep it a valid entity, partners in a limited partnership can leave at any time without the need to dissolve the partnership itself.
Limited Liability Corporation
An LLC is perhaps the best of all worlds when it comes to partnerships, sole proprietorships and corporations. Limited liability corporations are independent entities from the owners and allow for easy dispersion of personal and business assets and debts. As a combination between a corporation and a partnership, it is perhaps one of the easiest ways to go into business with another person.
Limited liability corporations are taxed in the same way as sole proprietorship if there is a single owner. They are taxed as a partnership if there is more than one owner/member. Taxing structures can be chosen from either the S corporation model or the C corporation model, although most LLC owners choose to avoid double taxation by choosing the pass-through taxation option. Owners of an LLC are protected against any and all liabilities against the LLC, which is its own separate entity from the owners themselves. Owners do not need to conduct yearly meetings among themselves and are not required to record the meeting if they should choose to do one on their own.
However, LLCs do have some drawbacks. LLCs require an operating agreement outlining the structure of the organization. This document is usually prepared using the services of a lawyer and lays forth the terms of operation in a clear way that enables you to bring on additional members if you wish with minimal risk to the integrity of your business.
Creating an LLC in North Carolina
Starting an LLC will begin with filing the correct paperwork in the state where you are planning to operate your business. While each state has its own rules and regulations, there are seven steps that you will need to follow to file an LLC no matter where you live. A description of the requirements specific to North Carolina will follow.
Choose a Name
In most states, you will not be allowed to have the same name for two entities in the same state. For example, you cannot have a business named Suzie Q’s Grocery Store, LLC and a business named Suzie Q’s Grocery Store, Inc. in the same state, even it they are in different cities. You might also be restricted from using certain words in your name.
In the state of North Carolina, you can call a business after your name without consulting anyone, as long as the name includes both your first and last names. A name that is not clearly defined as your legal name is considered to be an assumed name. If you choose to use an assumed name, you will need to check the Register of Deeds for the county in which you expect to operate to ensure that no one else is doing business under the name that you want to use. You will also need to do a North Carolina LLC search in online business directories, city directories, chamber of commerce lists and other similar resources for business with the same name in your area. Ensure that your business’s name does not include any prohibited words such as “Architect,” “Bank,” “Co-op,” “Insurance,” “Engineering” or “Mutual.”
Check the Trademark Registry of the North Carolina Secretary of State’s Office to determine if any of the wording in your proposed name has been registered as a service mark or a trademark according to the laws of North Carolina. In the course of your research of the database, you might come across one or more of the following status indicators:
- Administratively dissolved
- Auto dissolved
- Reserved name
Any of these status indicators means that the name attached is not available and cannot be used for your North Carolina LLC formation.
You can also check the U.S. Patent and Trademark Office for similar or identical federally recognized trademarks or service marks. To be on the safe side, ensure that you have received all of your paperwork from the North Carolina Secretary of State before you print any branded items such as checks, stationary or signage.
Choosing a distinguishing name when forming an LLC in North Carolina does not count if you add a designator such as “LLC” or “Limited Liability Corporation.” There are other designators used as well, but these are the ones that are the most commonly used.
Let’s pretend that your desired LLC name is “Frosty’s Ice-cream, LLC.” However, during the course of your database researches, you find a business named “Frosty’s Ice-cream, Inc.” In this case, your selected name would not be available to use in the state of North Carolina. In order to file this name, you would need to come up with a variation. An alternative option could be along the lines of “Frosty’s Cold Treats, LLC” or “Frosty’s Frozen Parlor, LLC.”
Slight grammatical differences do not count toward a distinguishable name. Adding an apostrophe or make certain words singular or plural are insufficient alterations to make a name that is considered unique. Neither do differences in articles such as “an,” “a” or “the” or differences in conjunctions such as “and” or “or.” Punctuation differences do not count, and neither do certain spelling differences such as spelling out the number “3.”
An LLC name should be easy and logical to spell. Variations like “Gabe’s Oughto Rhepair Shop” or “Noorthwesst Huntyng and Fyshyng Store” should probably be scratched off your list. Try not to have excessive punctuation in your LLC name either. “Date-and-Time-Clock-Repair, LLC” or “Float-Your-Boat, Rock-Your-World Marina, LLC” are also not the best options for an LLC. Neither are long names like “Long Days and Short Nights Productions, LLC” or “The Happiest Day of Your Life Catering and Photography, LLC.” Shorter names are easier to remember and less likely to slip the mind of your customers/clients. Your selected name should also have a positive connotation associated with your business. You want people to feel good when they hear the name of your LLC.
If you are not ready to officially file the name of your LLC, you can reserve it with the Secretary of State’s Office by paying a $10 fee. To register the name of your North Carolina LLC, you will be required to pay a $125 fee for the Articles of Organization. Annual Report filings for your LLC will cost you $200. You will need the following information:
- The name of the business. The name must include either the “LLC” initials or the words “Limited Liability Company.”
- The name and street address of the initial registered agent of the business.
- The name and address of the person executing the articles of organization.
- The business mailed address if it differs from the street address.
- The phone number and the street/mailing address of the principle office, if applicable.
The Registered Agent
The registered agent of a business is sometimes referred to as the statuary agent. The registered agent is responsible for receiving all official documents on behalf of the LLC and to pass them along to the appropriate parties. A registered agent can be yourself as the business owner or a professional RA from an agency.
Having a registered agent other than a member of your business can offer you a certain level of privacy as you will not have your personal address or the address of a family member on file with the state for receiving legal correspondence. North Carolina registered agents are technically known as commercial registered agents. If your registered agent is going to be an individual rather than a professional RA, the person needs to be a resident of North Carolina and at least 18 years of age.
The registered agent can also serve as a point of contact for receiving business-related correspondence including tax notices, payment reminders and other documents. The registered agent must have a valid North Carolina street address. Post office boxes are not allowed, as the state of North Carolina requires a physical location to ensure a record of the delivery of official or legal documents. The registered agent must also be available during all normal business hours, defined as nine to five in North Carolina. This is to ensure that the agent available to handle the delivery of Service of Process such as complaints, summons and/or subpoenas.
North Carolina commercial registered agents specialize in receiving Service of Process on behalf of your North Carolina LLC and will either forward it to you via mail or upload it onto your online account with them. Most commercial registered agents in North Carolina cost between $100 and $300 a year.
Articles of Organization, Coversheets, Operating Agreements and Statement of Organizer
When filing forms with North Carolina for starting up your new business, you will need to complete and file an Articles of Organization and a Coversheet with the North Carolina Secretary of State. These documents officially create your business and register the LLC under North Carolina law.
You can file your forms either by mail or online. The $125 one-time fee is the same for each option. Online filing tends to achieve faster results with notification of approval (or rejection) in three to five business days. Filing by mail is a little slower with notification of your filing status within four to six business days. The terms “LLC filing fee” and “Articles of Organization fee” are one and the same and can be used interchangeably. This is the document that, upon approval by the North Carolina Secretary of State LLC, officially creates your business entity.
Regardless of the filing method that you opt for, you will need to download and print the documents yourself in order to file them. To file by mail, you will sign and date the documents and mail them to the state along with a check or a money order. If you file online, you will scan and upload the documents to the state website and pay using a credit or debit card.
Following are fields that you can expect to fill out on the Article of Organization.
The desired LLC name for your North Carolina business. Although LLC is by far the most common, you can use any one of the following designators: LLC; L.L.C.; Limited Liability Company; Ltd. Liability Co.; Limited Liability Co.; and Ltd. Liability Company. Using a comma before the designator is an option, although it is perfectly acceptable to leave it out.
Name and address of each individual who is signing the document. This includes the Organizer(s) and the Owner(s)/Member(s). The Organizer is defined as the person who will execute the Articles of Organization. Being the Organizer of an LLC does not automatically make a person a Member/Owner of the organization. However, the Organizer can legitimately be a Member/Owner if so desired.
The name of your chosen registered agent. This is the person who agrees to receive Service of Process on your behalf in the event that you are involved in a lawsuit or another legal situation. In this section, you will either put the name of a person or the name of the company you are using as your registered agent. The street address and mailing address of the registered agent will also need to be filled out.
Principle office address and phone number. The principal office is defined as the place where the actual business operations are conducted or where all the official LLC documents and business records are located. A principal office can be an actual office building, a physical store location, a warehouse or your home. If you don’t yet have a principal office, you can check option B on the form.
Be advised, however, that you will need to provide the address of your principal office during your mandatory annual report filing. This information will need to be provided each year your LLC is in operation. You will need to include your mailing address if it differs from your physical address. Although you will be including your phone number on the form, it will only be used by the Secretary of State should he or she have any questions.
Additional provisions. This is an optional section that most people do not fill out. Additional provisions are other rules/requirements related to the LLC and are usually not used unless directed by an attorney or a business advisor.
Company officials. This is another optional section and is used for listing company officials, also known as the LLC members. If you have more than two LLC members, it is recommended that you leave this space blank to avoid confusion when opening a bank account for the LLC. LLC members can simply sign the LLC operating agreement, while the organizer can sign a statement or organizer to create a complete paper trail demonstrating how the members operate in relation to the organizer.
With the Operating Agreement and the Statement of Organizer Agreement, you should have little trouble opening a bank account for your new business. If you have one or more members besides yourself that don’t mind being listed publicly on this document, you can enter them here. Otherwise, leave this section blank and have the additional members sign the Operating Agreement.
Email address. Experts recommend that you enter your email address here to notify you of any documents that are filed on behalf of your LLC. This helps prevent “business identity theft,” which occurs when a person files documents on behalf of an LLC that they do either do not own or do not have the authority to do so. As with your phone number, your email address will not be made public. Use the email that you check the most often to ensure that you are aware of filings as they are made.
Effective date. This is the date that you wish your LLC to officially come into existence. If you would like the LLC to go into existence on the date that it is approved by the North Carolina Secretary of State, leave this space blank. You can also choose a later date not more than 90 days in the future of the date listed on your paperwork.
If you are filing for your LLC in October, November or December and don’t intend to open the date of approval, you can forward-date your filing to the first of January the following year. That way, you will not need to file any paperwork or tax returns for a business that isn’t even operating yet. Although you can forward-date, you cannot back-date the effective date.
If you have more than three members to your LLC and would like to list these names on your Articles of Organization, you will need to include a state-approved attachment with your filing. You don’t have to list all LLC members on the Articles of Organization. You can have any additional persons besides the organizer sign an Operating Agreement instead.
An operating agreement sets forth the terms under which the business will be run both financially and operationally. Unlike your Coversheet and your Articles of Organization paperwork, an Operating Agreement does not need to be mailed into the state. It is kept with your business records as an “internal document.”
The purpose of an operating agreement is to lay out in writing who the members of the business are and what percentage of the business they own. The operating also defines how the LLC is managed, how finances are handled and the method of distribution of profits and losses among members. Completion of the Operating Agreement is recommended before you have your initial visit with your attorney if you have a complex situation involving multiple non-related members, industry-specific management or detailed ownership agreements.
Regardless of whether your LLC is owned by a single person, family members or multiple non-related individuals, it is recommended that you have an attorney go over your operating agreement with you to ensure that you covered all the bases as you might need to provide a copy of the operating agreement to lenders, title companies, accounting/tax professionals, lawyers or potential investors or partners. An operating agreement should be flexible and able to compensate for changes within the organization such as address changes or switching to a different registered agent.
The Employer Identification Number
The employer identification number is to your new LLC what a social security number is to a person. It identifies you from all the other businesses in the country and allows to IRS to process your taxes and other important documents. Having an EIN allows you to:
1. Open a separate bank account under the name of your LLC
2. Apply for certain licenses and permits
3. Handle employee payroll
4. Obtain business lines of credit
5. Obtain business loans
6. File taxes at the federal, state and local level
Even though it is called an employer identification number, it does not necessarily mean that you have employees. An EIN is a type of tax identification number (TIN) that identifies your LLC to the IRS for North Carolina LLC filing. Similar terms for an EIN include:
- EIN number
- Employer ID number
- Federal employer ID number
- Federal employer identification number
- Federal tax number
- Federal tax ID number
- Federal tax identification number
Application for an EIN in the state of North Carolina is free, as the IRS does not charge anything for the application thereof. A social security number (SSN) or an individual taxpayer identification number (ITIN) is required to apply for an EIN. If you don’t have either of these, you will need to file using a different form. https://www.irs-ein-tax-id.com/learn/faq/get-ein-without-ssn/
The EIN responsible party is the individual who goes on file with the IRS when you apply for your North Carolina LLC. All correspondence related to your EIN will be sent to this person, who can be yourself or another member of your business. As of 2018, companies are no longer allowed to be the responsible party for an EIN.
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Each year, you are required to file a North Carolina LLC annual report with the state. This report is an opportunity to update your contact information for your LLC. At this time, you also pay the annual filing fee, which is $200 in the state of North Carolina. Both of these requirements must be met by April 15 of the year following the formation of your LLC and every year after that. You will receive reminders from the state several weeks in advance. Failure to file your annual report will result in dissolution of your LLC if you fail to send your annual report by June 14 following the notice of pending dissolution. Although the easiest way to file is online, it is possible to file by mail with an enclosed check or money order for the proper amount. The address you will be sending the annual report to is:
Secretary of State
PO Box 29525
Raleigh, NC 27626-0525
Depending on the type of business you are opening, you will probably need to register your LLC with the North Carolina Department of Revenue. You will be required to file annual state income tax as well as any additional tax documents that will be dependent on your business structure and whether or not you have any employees.
Proper calculation of your tax documents can be difficult to accomplish on your own. To avoid making potentially serious mistakes, experts recommend that you hire a tax professional to ensure that you are in compliance with the state. Your tax professional can also serve as a business advisor if you have business-related questions. Choose a tax professional who you’re comfortable with and who is a good fit for your LLC. Talk with two to three different people before making your final decision. The next guide is our North Dakota LLC step by step guide.