Starting with an LLC form business structure is perfect for new business owners. It takes several steps to form an LLC, but it is relatively easy to do.

What is a Limited Liability Company?

A limited liability company, or LLC, is a form of business structure that stands as a legal entity that are similar in nature to partnerships and corporations. LLCs are created under state law that provide the regulation of the company and commonly used in business. LLCs are a combination of different features of corporations and partnerships with regard to liability and tax benefits.

LLC owners are referred to as members. The management and control of the business stays with the members unless they deem otherwise in the organizational documents. LLCs are a hybrid that fits between sole proprietorships, partnerships and corporations. Like proprietorships and partnerships, LLCs will report all profit and loss of the business on each member’s own income taxes.

LLC formation is great for owners who want to keep their business entities separate and have liability protection without the formality of a corporation. You can be the only owner of an LLC in every state but Massachusetts. This is expected to change soon, however.

Differences Between a Limited Liability Company and a Partnership

The primary difference between LLCs and partnerships is that members of an LLC will not be held personally responsible for debt and liability of the business. Creditors may not come after any personal assets for LLC debt. Partnerships do not have this protection unless they are “limited” partners in the partnership agreement.

Forming an LLC: Overview

There are several things that you need to understand when you form an LLC:

  • An LLC is like a partnership but has the legal protections of your own assets, much like a corporation, without the complicated paperwork and formalities.
  • The rules for forming LLCs are different in each state.
  • New LLCs have to file Articles of Organization with the Secretary of State.
  • The forms to submit are short and only ask for the name of the LLC, the members and their contact information.
  • Filing fees typically range from $30 to $200.
  • There are registration requirements in some states.
  • You will be able to locate the rules and fees on your state’s website.
  • You should consider filing an operation agreement. Though not required, it lists all the details of the business, including the percentage ownership of each member, roles and responsibilities. This agreement will protect the LLC from being challenged in court.
  • You do not need an attorney to start an LLC.
  • It is smart to have an attorney look over your paperwork to be sure you are protected.
  • There is generally no annual paperwork due, but it is ideal to document any major events in the business. Having one meeting a year to hash out changes is helpful.
  • Some states will require fees and taxes every year, which can decrease the money-saving aspect of an LLC.
  • LLC advantages include pass-through taxation, which refers to taxes being passed on to the members of the LLC. Members then report profit and loss on their personal taxes. This results in lower tax payments.
  • Owners are not responsible for debt and liabilities of the business.

Step-by-Step Guide for Forming an LLC

  1. Choose the name for your LLC. The name has to comply with your state laws. The office in which you file your name is held in the Secretary of State’s office.
  2. The name may not be the same as another business in your state. You must also end your name with the LLC designator, such as LLC, L.L.C. or Ltd.
  3. Your business name cannot include words deemed not allowed by law, such as bank, corporation, insurance or city. The state rules will vary.
  4. Your state’s office will tell you if your chosen name is available.
  5. You can reserve your name for a small fee while waiting to file your Articles of Organization.
  6. You must also ensure your name will not violate another business’ trademark.
  7. You do not need to register your business name.

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