5 Things to Consider Before Establishing a LLC
Starting an LLC: Protect Your Assets, Minimize Bureaucracy, Legitimate Your Business3 min read
Starting a limited liability company (LLC) can be a great way to protect your personal assets, minimize bureaucratic headaches, and give your business a legitimate footing. But while going through the process can be exciting, it comes with a lot of steps and regulations. To understand the process further, understanding the following five key points is essential. If you’re based in New York, engaging with a lawyer who understands local regulations is especially important. With that in mind, here are the top five things to consider before establishing an LLC.
1. Choose a Name for Your LLC
The first step in beginning the LLC process is to choose a name. Depending on the state, there might be some restrictions that will limit the names you can choose. For example, some states require that the name must include “LLC,” “L.L.C.,” or some other variation for “limited liability company.” Typically, phrases such as “incorporated” and “corporation” are not allowed in LLCs. Additionally, you’ll need to make sure the name isn’t already taken. Once you select the perfect name, you can go ahead and register it with the state.
2. Secure Your Own Legal Counsel and Registered Agent
When filing to start an LLC, a registered agent is required. This is a third-party service provider that services business entities of all kinds with registered agent services and a place to receive official documents, like legal notices and governmental forms, on behalf of the company. In some cases, depending on the state, the owner of the LLC can also be the registered agent.
You should also look into getting general legal counsel for your LLC, specifically one with experience in the requirements and laws related to business in the state where you are setting up the LLC. The lawyer can make sure all of the documentation is in order, and offer pointers for navigating the complexities of setting up your LLC.
3. Have Your Operating Agreement Drafted
One of the necessary documents you’ll need for your LLC is an operating agreement. This serves as the set of rules that govern your LLC, and should outline the roles of individual members. If you add new members, you’ll need to revise the agreement accordingly. Having a lawyer available to help draft the agreement properly is especially important. This document can be customized to the needs of your LLC and should include important information such as the purpose of the LLC, rights and responsibilities of owners, membership structure, and issuance and transfer of ownership interests.
4. File Your Certificate of Formation
In New York, the document you’ll need for forming your LLC is the Certificate of Formation. This document outlines the structure of the LLC, including the name and address of the LLC, the effective date of formation, who is forming the LLC, the desired powers of the LLC, and the name and physical address of the registered agent. This document should be submitted to the state, along with the payment of the applicable filing fee. A lawyer who can advise you on the specifics of filing in New York should also be consulted.
5. Get the Right Tax Designation
The IRS must assign you a tax designation, which will determine how you’ll file taxes and what rules will apply to taxation for your LLC. The default tax designation for LLCs in the United States is “disregarded entity,” which means that income and losses are reported on the owner’s individual tax return. However, you may want to be treated as a corporation for taxation purposes. In this case, you can request a “C corporation” or “S corporation” tax designation for your LLC. You’ll need to complete Form 8832 and submit it to the IRS to get your C corporation or S corporation designation.
Setting up an LLC is a multi-step process that comes with various rules and regulations, particularly when forming an LLC in New York, where local regulations may apply. It’s essential to know the right steps to take in order to ensure that the process goes smoothly and that the LLC is set up correctly. Consulting with experienced legal counsel and a trusted registered agent can also be beneficial throughout the process.