Create an LLC: Everything You Need To Know
LLC's provide numerous benefits including tax protections, liability shielding, and easy startup compared to normal incorporation processes. 6 min read
Create an LLC
Why would you want to create an LLC? It’s simple, they provide numerous benefits including tax protections, liability shielding, and easy startup compared to normal incorporation processes. In this article we’ll detail exactly how to create your LLC, and how exactly to make the advantages work for you while avoiding inherent disadvantages.
How to Form an LLC
Creating an LLC, also known as a limited liability company, does require nearly the level of effort most people imagine. This process creates an organization that shares many characteristics with a partnership. However, it retains the legal protections for personal assets offered by a large corporation while removing all the frustrating rules, documentation, and expenses. The specific process through which an LLC is created is different for each state.
Steps to Form an LLC
In this article we will explain the process that will allow you to change your dream LLC into something real. This process won’t require any difficult rules to study, and you will not need to download or print anything. You can begin filing for your LLC after you take a look at these steps.
1. Choose a Name for Your LLC
Along with adhering to the state naming rules for an LLC, it is imperative that you ensure that name has no trademark-infringement" target="_blank">conflict with the trademark of any other organization. Upon discovering a useable title, it is not typically necessary to register that title with your state. Upon completion of your Articles of Organization, the title of your new enterprise is instantly registered.
2. File Articles of Organization
Now that you have confirmed the new title, the next step will be to fully complete “Articles of Organization” at the office where your state files LLCs. Although the phrase “Articles of Organization” is common in many states for describing the primary paperwork needed for an LLC, other states may use terms such as “certificate of formation” or “certificate of organization.”
- Filing Fees:
A problem with creating an LLC rather than sticking to the usual partnership or self-employment options is that you will be charged an additional sum upon submitting your Articles of Organization. Fortunately, the fee rarely exceeds $100. That being said, there are states such as California where a yearly fee of $800 is added to that initial cost. Typically, the cost is somewhere between $30 and $200.
- Advantages of Filing Fees and Paying Taxes
As previously stated, there are upfront costs that make an LLC a potentially less economic option. However, there are many advantages. For example, revenue and costs can be funneled out of the company and placed directly onto the tax returns of the owners. This process can yield lower tax costs because revenue tax is not the same for an individual as it is for a corporation. Additionally, the individuals in this case typically won’t have to cover the debts or liabilities of the corporation. California, for instance, charges an annual $800 LLC tax along with a $900 to $11,760 annual fee based on a business’s total annual income exceeding $250,000. Take the example mentioned before of California’s exorbitant up-front and yearly charges. These can all be transferred to individuals, circumventing expensive tax costs for the business. One final advantage is “go-through tax collection.” This means the upsides and downsides of owning the company are once again transferred to the owners who can transcribe the information to their unique assessment forms.
- Required Information
The initial documentation, the Articles of Organization, is quick and easy to complete. Truthfully, they can typically be completed by yourself within moments through simply filling out the form and marking the proper check-box in each section on the document you receive from your local filing office. The information needed is usually basic — just the company title, location, and usually identity of each owner, in this case referred to as “members.” In general, each owner of an LLC can complete the document, or choose a single representative to do it for the group.
- Registered Agent
Most articles also request the personal information of an individual, typically an owner, who can operate as the company’s representative. This representative is responsible for receiving documentation in the event of any legal issues that occur in the company’s future. Your representative can be a member or a manager, which is different from larger organizations where a board full of directors must oversee all big choices the company makes, while leaving the daily operations to lower level leaders.
3. Create an LLC Operating Agreement
For the agreement detailing the operations of an LLC, the owners must outline the bylaws both for retention of rights and day-to-day functionality. This process is similar to that of a corporation or partnership where bylaws might be outlined. Once you have obtained the properly submitted Articles of Organization, they are sent directly to you alongside all other required documentation. While not necessarily stated by lawmakers, an agreement for daily operations should be drafted which details all aspects of the company. These would include the percent of the business each person owns, their role, and the parts of the business for which they are responsible. Make sure a third party studies all your documentation and agreements to ensure that your personal goals are safeguarded. Because the process for preparing an LLC is so simple, legal counsel is often unnecessary.
4. Publish a Notice (Some States Only)
In some states, there are extra layers to the process of formalizing your new business. You may have to have an announcement released through a local newspaper detailing your intention to create an LLC. These laws demand that this announcement be published repeatedly during a set period of time, with documentation called an “affidavit of publication” submitted to the proper authorities. Details for this process can be explained by someone at a nearby news office.
5. Get Licenses and Permits
Now that all the above processes are finished, you’ve officially created a new LLC. However, before your company can actually be opened, there are more hoops to jump through. Permits and licenses are still needed for any new company to begin operations. You’ll likely need a business license (aka a “tax registration certificate”), an FEID, and either a sellers’ or zoning permit.
Potential LLC Disadvantages
Remember these issues you may encounter in forming an LLC:
- There will likely be yearly charges levied against you by the government.
- The charges may not be high for an existing company, as the upfront cost for a new business is greater than that of a sole proprietorship or a general partnership, neither of which requires so much official government documentation.
- There are areas such as Arizona or New York where your leadership will have to pay for announcements in local papers prior to the company being formed.
- It is typically more difficult to replace existing owners. You cannot sell stocks between owners as you can in big corporations.
- There is less historical precedence for LLCs. They are a relatively new process for incorporation, which can make fighting on legal grounds more challenging.
Why We Need an LLC
While you may feel like there are too many obstacles in front of your LLC, the positives of this sort of incorporation are numerous, and they cannot be obtained any other way. They can include the following:
The Benefits of Forming an LLC
- Secure your personal assets through liability protection
- Various opportunities for deductions
- Lower the chances of audits
- What separates LLCs from other entities like an S corporation is the freedom from limitations on both the identity and number of owners involved in an LLC.
- They afford protections on limited liability for the individuals in charge. These people usually hold no responsibility for loss or legal trouble the company might encounter.
- Ownership can’t be assaulted by debt collectors; they can’t attempt to touch the personal assets of those members to pay off the debt of the company.
- In most other corporate structures, the people in charge and the company itself are considered identical for legal purposes, threatening your wealth and assets.
- Tax payments on the company are typically lower with so much expense sent along to individuals.
- Creating an LLC might assist a young company in building respect and influence in their client pool, with new hires, as well as with vendors or partners since they will understand how serious you are about making this company succeed.
If you need help with forming an LLC, including filing fees and obtaining licenses or permits, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.