Key Takeaways:

  • Forming an LLC provides personal asset protection and a solid foundation for business growth.
  • After forming an LLC, obtaining necessary permits and licenses is essential for legal operation.
  • An LLC can apply for an EIN for ease in tax filing and working with clients and vendors.
  • S Corporation status may offer tax advantages for LLCs in certain scenarios.
  • Business bank accounts and credit cards help separate personal and business finances.
  • Insurance policies like BOPs and general liability coverage are recommended for risk protection.
  • To maintain compliance, avoid fraudulent asset transfers and tax evasion with an LLC.
  • Consider partnerships and review operational agreements carefully when co-owning an LLC.
  • Additional actions, like creating business credit profiles and setting up payroll if hiring, further enhance your LLC's credibility and functionality.

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.

Establishing Business Credit and Financing Options

Once your LLC is established, building a business credit profile is crucial for future financing options. Starting with a dedicated business credit card and applying for a Dun & Bradstreet D-U-N-S Number can help establish creditworthiness, enabling access to loans and better credit terms. Many suppliers offer credit options to established LLCs, which can aid in managing cash flow for inventory or expansion without dipping into personal funds.

Setting Up Payroll for Employees

If you plan to hire employees, setting up a payroll system is necessary to manage tax withholding, benefits, and compliance. Payroll services, such as Gusto, ADP, and QuickBooks Payroll, can simplify this process by automating calculations and filings. An organized payroll system ensures timely employee payments and compliance with tax regulations, which is essential for your LLC’s reputation and legal standing.

Exploring LLC Benefits for Side Gigs and Passive Income

One of the cool things you can do with an LLC is use it to manage side gigs or generate passive income. Many side hustlers create LLCs for projects like freelancing, consulting, real estate investing, or e-commerce. An LLC provides a professional framework for invoicing clients, paying subcontractors, and managing related expenses. Passive income ventures, such as rental properties, can also benefit from the tax advantages and liability protection an LLC offers, allowing for both asset growth and protection in these secondary income streams.

Obtaining Intellectual Property Protection for Your LLC

Your LLC can own trademarks, patents, and copyrights, making it easier to protect and manage intellectual property (IP). Filing for trademarks or patents under your LLC separates the IP from your personal assets and ensures that it remains with the business even if ownership changes. This is particularly advantageous for businesses that build valuable brands or develop unique products, as it provides a layer of protection against infringement and misuse.

Hiring Contractors and Using Non-Disclosure Agreements (NDAs)

Hiring independent contractors is a common practice for LLCs, especially when a flexible workforce is needed. Drafting clear contracts and using Non-Disclosure Agreements (NDAs) protects sensitive information and clarifies the relationship with contractors. By hiring as an LLC, you can set up contracts under the LLC name, thereby reinforcing separation between personal and business liabilities.

Avoiding Commingling of Personal and Business Funds

To preserve the liability protections of your LLC, it's essential to keep personal and business finances separate. Commingling funds — such as paying personal expenses from your LLC account or vice versa — can lead to "piercing the corporate veil," where courts may hold LLC members personally liable. Always use dedicated accounts and keep clear records to demonstrate that the LLC operates as an independent entity.

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.

If you need help understanding what you can do with an LLC, 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.