What can you do with an LLC? Forming a limited liability company is a crucial first step toward setting a good foundation for your business and protecting your personal assets.

What Happens After Forming an LLC?

Creating your limited liability company is just the start. You're legally poised to open for business, but there are several steps you need to take before the business is official.

First, obtain the necessary permits and business licenses. You will need to obtain these separately and check for any permit requirements. Depending on what type of business you own and its location, you may need to secure a license through the county, town, or state. Forming an LLC alone isn't the same as getting a business license. Examples of permits and licenses include:

  • Zoning permits
  • Professional licenses
  • Health department permits
  • General business operation licenses
  • Home occupation permits

Fortunately, many of these licenses are inexpensive and easy to obtain. Getting one upfront will ensure your business operates legally and avoids any fines. Just be sure to research your local requirements carefully.

Many states also require a seller's permit, which is required for LLCs, sole proprietorships, partnerships, and corporations that sell taxable services and goods. For instance, a seller's permit is required in California for any business that leases or sells property subject to the state's sales tax. You must get the necessary seller's permit before selling anything to the public.

Next, obtain an Employer Identification Number from the Internal Revenue Service. Also known as a federal tax ID number, an EIN serves as a way of identifying your business to the IRS for tax purposes and for tracking its transactions. Think of it as a Social Security number for your LLC. You don't necessarily need an EIN, unless you hire employees, but it's still good practice to obtain one because you can give the number to vendors and clients without providing your Social Security number.

If applicable, apply for S corporation status. An LLC is a pass-through tax entity by default, which means that the company's profits and losses are passed through to the members and then reported on their tax returns. In some cases, electing S corporation status may benefit the business because you can split profits into distributions and salaries. You'll still pay self-employment tax on the salaries, but not on any distributions.

File Form 2553 with the IRS to elect S corporation status within 75 days of forming your LLC or from the start of the existing tax year.

Finally, open your business bank account and apply for a business credit card. You can open the account under your LLC name, which means you can accept checks payable to your company. Since LLCs and corporations are obligated to separate their personal and business finances, it also makes sense to have a business-related credit card. When you put all your company expenses on the credit card, you have an automatic paper trail that makes it easy to review end-of-the-year expenses.

After forming your LLC, it's time to insure the business to keep it protected from losses. Consider getting a business owners policy (BOP) or general liability insurance.

Activities to Avoid With an LLC

While you can achieve great things with an LLC, there are also activities that can get you into trouble with the law. For example, if you transfer your personal assets to the LLC in an attempt to protect them, you've fraudulently conveyed those assets. Fraudulently conveyed assets include those that are:

  • Transferred or sold under fair-market value
  • Transferred in an attempt to keep creditors from seizing them

You cannot form an LLC as a means of avoiding a creditor. Fraudulent conveyance is considered a civil offense and will cost you a lot of money in legal fees. You also can't form an LLC with the intent to avoid paying taxes or reduce your tax burden. Tax avoidance is legal and acceptable, which includes transferring money to a Roth IRA to defer taxes, but avoiding them altogether is considered a crime that could result in jail time.

If going into business with a partner, make sure you know the person and go into the relationship with your eyes open. You both want to stay on the same legal page.

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