1. LLC Business Structure and Startup Expenses
2. Federal Tax
3. LLC Filing Process

Estimating LLC startup expenses is one of the most important steps in forming a business. Once a company estimates their startup expenses, a budget can be created to ensure the LLC will not run out of capital.

LLC Business Structure and Startup Expenses

By combining a corporation and partnership business structure, a limited liability company (LLC) protects its owners from personal liability and allows for direct management control over their company. An LLC consists of one or more representatives. LLCs have a flexible, simple business structure, providing liability protection, complete management control, and lower taxes, making it the most popular form of business.

The cost of starting a limited liability company varies significantly, depending on your business. Estimating initial expenses helps to secure capital and is a tool for long-term success. Initial costs include state filing costs, which range from $40-$500 depending on the state, and required licenses, permits, or certifications. Calculating startup costs also provides answers to basic questions such as:

  • Business location
    • Will you work from home or rent space?
  • Employees
    • Do you need to hire employees?
    • If so, how many?
  • What does your business require?
    • Inventory
    • Raw materials
    • Equipment

Federal Tax

Federal tax laws allow LLCs to deduct initial startup costs, as long as the expenses occurred before it begins conducting business. A business is considered active the first time the company's services are offered to the public. The IRS sets a $5,000 deduction limit on startup and organizational costs. A business can deduct the amount paid for product creation and research from their taxes. For example, fees paid to survey potential markets would qualify as tax deductible.

Write Off Expenses Include:

  • Attorney and bookkeeping costs
  • Licenses, permits, and other fees
  • Market and product research
  • Advertising costs
  • Website development
  • Building or office space lease expenses and utilities paid prior to opening the business
  • Business equipment that is rented
  • Employee training expenses
  • Costs associated with finding financing, suppliers, customers, or distributors.

Exceptions:

  1. Inventory cost is deducted when its sold or if the merchandise doesn't sell.
  2. Long-term assets are supplies lasting longer than one year. This includes office equipment, computers, vehicles, and machinery. Assets purchased prior to opening the business do not qualify for a tax deduction and are not viewed as startup expenses.
  3. Research and development expenses qualify for deduction under Section 174 of the Internal Revenue Code.
  4. Costs include:
    • A new invention, formula, prototype, or process
    • Laboratory and computer supplies
    • Salaries
    • Rent
    • Utilities
    • Overhead costs
    • Equipment rental
  5. Organizational costs include the costs to form the company, and are treated the same as startup expenses.

Deducting Vs. Amortizing Startup Costs

Under amortization rules, a business' initial setup and organizational costs are considered capital, or financial overhead, and require the business to take deductions over the 180-month period that starts when the LLC begins operating. The IRS requires an LLC to fill out Form 4562 and Form 4862 and submit the paperwork with the company's first tax return. Form 4862 provides information such as:

  • Business description
  • Description of all startup costs
  • The date that the LLC started the business
  • The amortization period the business is choosing

LLC Filing Process

Forming an LLC is an easy process with few steps.

Choose a Unique Name

Naming a business is not an easy task. Choosing a poor name can lead to many setbacks, including legal problems. Follow simple guidelines to protect yourself:

  • Choose a name that is timeless, can be pronounced and recognized with ease, and is one of a kind.
  • The name has to end with: "Limited partnership", "L.P.", or "LP".
  • The business's name can't have terms such as corporation, incorporated, bank, insurance, corp, trustee, inc., or trust.
  • To avoid possible problems, search the internet to see if the name already exists. Check for errors in the name. Search for registered trademarks on the U.S. Patent and Trademark Office website and through the Secretary of State.

File Required Documents

Articles of organization documents are open to the public. They are submitted to the Secretary of State, along with filing fees. Requirements vary from state to state and it is recommended to visit your state's website.

In the articles of organization, you must include:

  • Your LLC's name
  • Address and name of the registered agent
  • Business objectives
  • Members' names
  • The intended lifespan of the company

Some states require a separate operating agreement. Operating agreements are confidential documents that describe the company's ownership and management style, and members' rights and obligations.

Announce Your New Business

In some states, you are required to announce your LLC filing in the classified pages of your local newspaper.

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