Starting an LLC: Everything You Need to Know
Need to know how to start an LLC? The good news is that there are only five simple steps to starting one.8 min read
Starting an LLC
Starting an LLC (limited liability company) is a major professional step. To explain, an LLC is a business entity defined as its own legal organization. There are two types of LLCs: single-member LLC (owned by one person) and multi-member LLC (owned by multiple people).
Business owners choose to make their entity an LLC because it is the easiest way to ensure personal liability protection while operating their business. The benefits of forming your business as an LLC include reduced paperwork, prevention of your business getting taxed more than once, more credibility added to your business, and protection from lawsuits.
Need to know how to start an LLC? The good news is that there are only five simple steps to starting one:
- Select a state
- Determine your LLC’s name
- Register an agent
- File the articles of organization
- Craft an operating agreement
Why Form an LLC?
An LLC is just one type of business structure. An LLC can have multiple owners or be owned by a separate business. When your business in an LLC, you don’t need to have annual meetings, and owners of the LLC can include their profits and losses on their personal tax returns. There are multiple examples of various business structures:
- An S-corporation: The lifespan of the business can be ongoing, and owners can issue share of stock, report profit and losses on their personal tax returns, and have limited liability for business debts.
- A C-corporation: Like an S-corporation, a C-corporation allows for an ongoing lifespan of the business, can be owned by a separate legal entity, can have more than one owner, and those owners are allowed to offer share of stocks, split profit and losses, and have limited liability of company debts.
- A general partnership: This structure allows partners of the business to have foreign offers, have multiple owners, and report profit and losses on personal tax returns.
- A sole proprietorship: A sole proprietorship allows owners to have foreign offers and report profit and losses on their tax returns. They do not need to hold annual meetings.
An LLC is a more appealing option for small businesses because it offers more personal asset protection than a sole proprietorship. LLCs provide limited liability whereas sole proprietorships do not. And LLCs are far easier to create and operate than corporations. They also can also avoid double taxation.
Pros of an LLC
- LLC owners have no responsibility for any lawsuits or debts that affect the LLC, so long as they have not engaged in any fraudulent or illegal activity.
- Any profit the LLC generates goes straight to the owners. From there, the owners report their profits on their personal tax returns.
- LLCs are not subject to double taxation. Because they are taxed only once, it is called “pass-through taxation.”
- Forming an LLC is straightforward, and minimal paperwork is required. No official officer roles, record of company minutes, resolutions, or annual meetings are required of LLCs. If you plan to form an LLC with more than one member, it is strongly encouraged that you create an operating agreement that would protect your members from any legal disputes.
- An LLC is considered to be more formal than a partnership or sole proprietorship and therefore makes the business more credible.
- Forming an LLC also allows you to create a credit history for your business, and this presents the opportunities to obtain lines of credit and loans.
Cons of an LLC
When your business is formed as an LLC, you are unable to list it on the stock market. This makes it trickier to secure venture capital and eventually go from an LLC to a corporation, if that was one of your goals.
How Much Does It Cost to Form an LLC?
How much it costs you to form an LLC will depend on the state you live in. It could cost anywhere from $50 to $500 to form the LLC and an annual fee of $100 to maintain the LLC. If you work with an attorney, your fees increase.
What Is a Registered Agent?
The person that you appoint to be the official receiver and sender of paperwork is your registered agent. Documents that you file with the state and service of process of legal action paperwork are some examples of what the registered agent would be responsible for sending and receiving.
Without a registered agent, you will not be able to form your LLC. When you form a domestic LLC, you can be the registered agent. Otherwise, the registered agent you choose must be someone who lives in the state where you are forming the LLC.
What Is an Operating Agreement?
This is the document that provides pertinent details on LLC ownership and operating procedures. With this legal agreement, you can specify the financial and operational relationships among the LLC member (owners).
What Are Articles of Organization?
During the process of forming your LLC, you submit this legal document to the state. This document includes information regarding the name and purpose of your LLC as well as the name and address of the registered agent for the LLC.
How Are LLCs Taxed?
Unlike C-Corporations and S-Corporations, LLCS are not subject to federal income tax. All profits that come through the LLC go directly to members. Once the member receives their profits, they report their earnings on their personal tax returns. If the LLC has multiple members, it is required to submit form 1065 to the IRS, the document that shows the annual earnings of the LLC.
Although LLCs do not pay federal income tax, there are state taxes that need to be paid. Most states have a “franchise tax” for LLCs. This is a percentage of the LLC’s earnings or a flat-rate. LLCS with employees have to register for Unemployment Insurance Tax and Income Withholding Tax. LLCs that sell products and services must have a seller’s permit and abide by sales tax requirements in their state.
What Is an LLC License?
Technically there is no LLC license. Instead, business entities are required to have a state business license, whether that business is a sole proprietorship, corporation, or LLC.
How Long Does It Take to Form an LLC?
Typically, an LLC can be officially formed within three weeks, sometimes less. For an added cost, most states offer expedited LLC formation, sometimes taking only one day to complete.
Does an LLC have a Board of Directions?
No. Though it is a requirement for corporations, LLCs can be operated solely by members or just one owner. In some instances, the Articles of Organization nominates a non-member manager for the LLC.
Does an LLC have Shareholders?
No. LLCs cannot participate in the stock market. Instead of issuing stock, members of the LLC split profits. In your Operating Agreement, you should outline how profits will be split in specific detail.
Can I Form an LLC in Another State?
Business owners who have already formed a domestic LLC and want to expand to other states need to form a foreign LLC. Only form a foreign LLC in another state if you plan to do business in that state.
Do I Need an Operating Agreement?
You are obligated under law to have an operating agreement if you live in one of the following states: New York, Nebraska, Missouri, Maine, Delaware, or California.
However, even though you may live in a state where an Operating Agreement isn’t a legal requirement, is it highly advisable to obtain one. An Operating Agreement is beneficial for an LLC with multiple members because it can clearly set the roles and responsibilities of each member.
If you don’t have other members of your LLC and you are the only owner, an Operating Agreement is still useful because it makes your LLC more reputable. It makes it easier for courts to maintain your LLC’s limited liability status.
An operating agreement need not be submitted to the state. After you fill one out, keep it with your records. You can also provide your members with copies.
Do I Need a Registered Agent?
Yes. You cannot form your LLC without one. Appoint a registered agent before attempting to file your articles of organization. The registered agent that you appoint must have a physical address in the LLC’s state. The company itself cannot be the registered agent, but the owner of the LLC can be the registered agent.
Why Use a Registered Agent Service?
- Flexibility. If you decide to operate a business that isn’t open during the traditional 9-5 hours throughout the week, you can hire a registered agent to be open during those hours and accept documents on your behalf.
- When you have a registered agent, you will be able to develop an LLC in any state, regardless of whether or not you live in that state. This means that if you live in New York but wish to benefit from the tax laws of a different state, you could pick a registered agent in that other state and set up your LLC.
- If you plan to operate your business in more than one state, you can appoint a registered agent who is in multiple states.
- If your business address is your home address, appointing a registered agent will give you more privacy. Your registered agent’s address is a public record, and that address will be used instead of your address.
- You can use your registered agent’s office address as the official headquarters for your business. If for some reason your business is ever sued, lawsuits will be served to the registered agent’s office instead of at your place of business where your employees and customers can see.
- Having a registered agent service will also help you stay on time with state filing, and you can be reminded whenever something is due. This will help you stay in compliance with the law. A registered agent service will also be able to help you find accountants and other legal experts that you might need.
How to Choose the Best Registered Agent Service
Not every registered agent service is the same. When looking for a registered service agent, there are some important features you should expect to find:
- The registered agent has an office in the state that you do business.
- They offer compliance management and will remind you of any filing that is due.
- They will manage your documents and allow you to access them on an online account.
- They are readily available to answer all of your questions and assist you when you need help.
- They can offer their services in all 50 states.
What Is Workers’ Compensation?
Workers’ compensation is insurance that employers offer to their employees for any injuries, illnesses or disabilities that are caused by their job. Workers’ compensation regulations vary from state to state.
The point of workers’ compensation is not only to provide your employees with insurance, but to also protect your business. When one of your employee’s collects workers’ compensations, they cannot sue you later on.
The matter of whether or not your business will need to acquire workers’ compensations insurance depends on the type of business you operate and state regulations. For example, in the state of California every company is required by law to have workers’ compensation insurance. In other states like Florida and Alabama, your business needs workers’ compensation if it has four or more employees. And in states like Texas, employees are not required to offers workers’ compensation at all (although they do have to inform their employees of this). No matter where you operate your business, workers’ compensation insurance is generally a wise investment to protect both your business and your employees.
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