When to Start an LLC: Everything You Need to Know
When to start an LLC is when the prospective LLC owner has a business or has decided to start one and has met the LLC formation requirements.3 min read
- A valid business name.
- A chosen state to form the LLC in.
- Articles of organization.
- Registration fee.
- A registered agent.
- An LLC operating agreement.
- Readiness for tax obligations
Forming an LLC
You should form an LLC or an S corporation if your business is young and you're worried about liabilities. LLCs are similar to S corporations in many ways, but are flexible and take less paperwork. They're entities that are separate from their owners (also referred to as members) who are not individually required to pay business debts.
Therefore, LLCs protect their members from personal liability while offering them several options of taxation. Owning an LLC also affords your business a professional authority and makes it a recognized, legal entity.
The Tax Flexibility Advantage of LLCs
The IRS doesn't see LLCs as separate entities for reasons of taxation, which means, by default, LLCs aren't liable to pay taxes directly. Rather, LLC owners are allowed to define how they prefer to be taxed. That's because LLCs are treated as “pass-through entities,” which means their owners directly share in their profits and losses.
Usually, in a corporation, taxes are compulsorily paid from the corporation's net profit before profits are shared, after which individuals are taxed from their profits, resulting in double taxation. However, LLCs operate differently and protect their owners from double taxation.
Limited Liability Advantage of LLCs
The meaning of “limited liability” is that debts and other negative transactions of the business are limited to the assets owned by the business. Which means creditors of the business can't demand that the individual business owners pay the debt of the business from their personal assets.
Self-Employment Tax Disadvantage of LLCs
Except members opt for their LLCs to be taxed like corporations, they'll have to pay self-employment taxes. Self-employment taxes are often higher than corporate level taxes, and individual members have to pay for Social Security and Medicare. Those are some of the reasons you should get the help of a versed lawyer or accountant if you're looking to start an LLC.
Choose a Name
There are two things to consider in choosing a name for an LLC. First, choose a name that's not been taken by another LLC in your state. Majority of states disallow the same name for more than one business body. For instance, you're not allowed to have “Donald's Muffins, LLC” if there's already a “Donald's Muffins, Incorporated,” even if the two are in different towns.
The next consideration is that the business name you choose must satisfy state standards for LLC names. For instance, “limited liability company” or “LLC” must be part of your business name. A lot of states also disallow businesses to use certain words like “bank” in their names. You should search existing business names in various states, on the internet, to find out if your proposed LLC name is taken.
Get a Registered Agent
LLCs are required by every state to appoint registered agents (also referred to as statutory agents). The registered agent is the one who represents the LLC in the event of a lawsuit, and also receives legal orders and other official articles for the members of the LLC.
Get an Operating Agreement
The operating agreement of an LLC is the document that holds the guidelines that run the LLC. It spells out things like the voting rights and ownership interests of the members, how profits and losses should be shared, and how meetings should be conducted.
It also specifies how member losses should be handled and how the LLC should be disbanded if it fails. The operating agreement can have as much detail as the members deem necessary to prevent conflicts and ensure the smooth running of the LLC.
How LLCs are formed vary from state to state. However, you'll typically have to file the following:
- The LLC's purpose.
- The proposed lifespan of the LLC.
- The registered agent's name and address.
- The LLC's name and address.
Figuring out when, how, and where to start an LLC can be complicated without qualified, professional help. Getting it right from the beginning gives the LLC a great start.
If you need help with when to start an LLC or the whole LLC creation process from start to finish, you can post your job 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.