LLC Company Formation: Everything You Need to Know
LLC company formation varies depending on the state you choose to form your LLC. An LLC formalizes your business and separates one’s personal affairs.3 min read
2. Steps in Forming Your LLC: Overview
LLC company formation varies depending on the state in which you choose to form your LLC. One of the main reasons for creating an LLC is that it formalizes your business, and separates one’s personal affairs with the business.
After forming your LLC, you can enjoy its many benefits, including limited liability protection and pass-through taxation. You can also choose how you want to manage the LLC, which is another advantage for multi-member LLCs.
Advantages vs. Disadvantages
There are many advantages to operating an LLC. Of course with any business, the advantages can also come with some disadvantages. Therefore, before you choose to form an LLC, keep in mind these pros and cons of the LLC business structure.
Some of the many advantages include:
- Personal asset protection, as creditors cannot go after your personal assets if the LLC is in debt to a creditor(s).
- Pass-through taxation, which means that the LLC need not file corporate income taxes. Instead, the profits and losses of the LLC are passed to the LLC members who file on their personal tax return forms.
- No residency requirement, as LLC members can be located in any state and in any country.
- Greater credibility, as most companies would prefer to do business with a formal business that is registered.
There are also some disadvantages to operating an LLC, and these can include:
- Limited growth potential, as the LLC cannot issue shares of stock
- Lack of uniformity, as some states treat LLCs differently than other states
- Self-employment tax
- Tax on appreciated assets, which occurs if you convert your existing business to an LLC
Steps in Forming Your LLC: Overview
There are several steps that must be taken when forming your LLC. Before you even begin filing any paperwork, you’ll have to choose a business name. When choosing a name, you’ll want to pick a name that is easy to remember, has a positive connotation, and matches the type of industry in which you are operating. Even more importantly is the fact that there are requirements you must abide by when choosing a name. Most states have the same requirements and restrictions, which include the fact that your name must be available for use, it must include the LLC business designator, and must not include prohibited terms.
After choosing your name, you have to file the Articles of Organization with the Secretary of State’s office. While most states charge only $100 to file this document, some states charge additional fees like an annual tax.
Most business owners file the Articles of Organization on his or her own, as the document itself is easy to fill out. You can usually fill in the information within a few minutes, as you usually just need to include the business name/address, principal place of business, registered agent name/address, and member names/addresses. You will also need to identify how you want to manage the LLC. If you want the members to manage it, then it will be a member-managed LLC; however, if you want an outside party to manage it, then it will be a manager-managed LLC.
After you have submitted the Articles of Organization, you should draft an Operating Agreement. While this document isn’t mandatory in most states, it is extremely helpful for your business to have. Some of the items that should be included in this agreement are:
- Member ownership percentage
- Voting rights
- Buy/sell provisions
- How the LLC will be managed
- How and when the LLC will conduct meetings
- Member’s duties and roles within the LLC
After you create the Operating Agreement, you should provide a copy to all members and keep an additional copy on file, which should be signed by all members of the business.
Thereafter, you might need to obtain an Employer Identification Number (EIN). This number is a tax ID number for your business. In order to obtain it, you will file Form SS-4 with the IRS. There is no cost for obtaining this number. Keep in mind that even if you are not required to have an EIN, you might not be able to open a business bank account without one. Many banks and other vendors will not conduct business with an LLC that has no tax ID number.
If you need help learning more about the LLC formation process, 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, Menlo Ventures, and Airbnb.