Are you thinking about starting a Limited Liability Company? Read our guide on LLCs to learn the steps you must follow.
Starting your own business can be an exciting time. You’re finally one step closer to transforming your idea into a viable business. Yet, the process of setting up a business can also be overwhelming. There are plenty of documents, requirements, and rules you must figure out. So, you may be feeling a little bit confused about where to start.
Luckily, while starting a business can be a daunting task, it’s not impossible, no matter how complicated it may seem. All you have to do is to know exactly the steps you must follow to have a legally functioning company.
LLCs are a popular choice among new small business owners because this type of structure provides certain benefits, including liability protection and management flexibility.
Ready to learn how to start your own LLC? Keep reading our guide to understand better what an LLC is, the benefits of forming an LLC, and how to do it.
What is a Limited Liability Company (LLC)?
First things first, before we move forward to starting an LLC, let’s make sure you understand what a limited liability company is and the benefits of forming one.
An LLC is type of a business structure that provides limited liability protection and pass-through taxation. An LLC exists as a separate entity from its owner, which generally means the owners can’t be held personally responsible for business debts or liabilities. Besides that, an LLC allows pass-through taxation, meaning that its income isn’t usually taxed at the entity level.
An LLC is a hybrid entity that combines characteristics of corporations and partnerships or sole proprietorships.
The benefits of forming an LLC
Choosing to form an LLC has plenty of benefits compared to other business structures, including:
- Separate legal identity: The LLC is an entity separated and apart from its owner. It had its own rights, responsibilities, and liabilities. Limited liability: The owner of the LLC is shielded from personal liability for acts of the LLC entity or its other members.
- Flexibility in management: The owners can manage the LLC on their own or choose a management group to do so.
- Pass-through taxation: In most states, LLCs don’t pay taxes at a business entity level. The company’s profits and losses flow through to the owners (also known as the „members”).
- Looser compliance requirements: Compared to other business structures, an LLC faces fewer ongoing formalities, such as meetings and resolutions.
Steps to forming an LLC
Now you know what an LLC is and the benefits of forming one. But you are likely still confused about where to get started with forming your own LLC. Here are the major steps to follow to turn your idea into a viable business:
Choose a state in which you form your LLC
You can choose to form your LLC in whatever state you want, even if your LLC won’t be doing business in that certain state. Each state has different requirements and procedures, which means choosing the right state for your new busienss is an important consideration. However, most owners form their LLC in the state where they will be doing business, which is typically also where they live. This is usually simpler and less costly than forming in another state, since the LLC may need to foreign qualify in the home state anyway.
While at a glance, the requirements and procedures are pretty much the same, the costs, taxation, and some LLC laws vary from state to state. By doing up front research, you can be prepared for the costs of maintaining your business and avoiding noncompliance issues down the road.
Choose a name for your business
The next step is to choose a name for your limited liability company. Your company name says a lot about your service and brand. For this reason alone, you should spend meaningful time selecting a name for your LLC.
Before you start using that name, however, you need to make sure the name is available in your state. Every state maintains a searchable database of registered companies. Your LLC name cannot match or be too similar to an existing buisness.
You may also consider conducting a trademark search of the desired name to ensure that you avoid intellectual property infringement or confusing your customers later when your business is functioning.
File articles of organization
An important step in forming an LLC is to file articles of organization with your state’s corporate filing office, which generally is the secretary of state. Each state has specific forms and fees to form an LLC. Filing fees to form an LLC range from around $50 to over $400. Many states now offer the convenience of filing articles of organization online. This usually results in swifter processing time. However, you can expect to wait anywhere from a day to a few weeks for approval.
Choose a registered agent
LLC need to have a registered agent when they file with the secretary of state. A registered agent is either an individual or a company that agrees to accept legal papers, such as service of process, on behalf of the LLC. The registered agent for your LLC must have a physical street address in the state where you are forming your LLC.
You may generally designate an individual to serve as your LLC’s registered agent. However, there are many reasons why it can be better to choose a registered service provider to assist with these legal papers. For example, if the individual is not available when time-sensitive legal papers are delivered, this can lead to serious consequences, up to and including default judgment.
Create an LLC operating agreement
The LLC operating agreement establishes ownership interests, how your limited liability company will be run, and how it will be managed. While some states don’t require an operating agreement, many banks and lenders do. Having an operating agreement also helps during litigation, transfer of ownership, dissolution, and other legal matters.
Obtain an Employer Identification Number (EIN)
Your LLC will also need an employer identification number to do business, regardless of whether you will have employees. The EIN will be used on your LLC’s bank accounts, as well as income and employment tax fillings.
Obtaining an EIN from the IRS is straightforward. If your business has a US address, and the responsible party is a US citizen with a social security number, you can obtain an EIN online in minutes. There is no fee to obtain an EIN directly from the IRS.
International applicants must file the paper form SS-4. In this case, the IRS can take several weeks to issue the EIN.
Open a business bank account
Opening a business bank account for your LLC is vital. It helps separate business finances from your personal ones. This allows you to start depositing company revenues and paying out expenses from a separate place. This is beneficial not only as a matter of daily convenience, but also during tax season and especially in the event of an audit or litigation.
Apply for tax accounts, business licenses, and permits
Once your LLC is set up, you may have specific tax registration and business license requirements based on your activities or location. The SBA provides a helpful tool to do that research. Then, be sure to apply and register, ideally in advance of starting activity.
While your business and state are unique, starting an LLC doesn’t have to be challenging. By now, you should know the basics of what it takes to form an LLC in any state. By continuing to do research for your specific situation, and engaging legal and tax professionals for advice, you’ll be equipped for success!
Harbor Compliance does not provide tax, financial, or legal advice. Use of our services does not create an attorney-client relationship. Harbor Compliance is not acting as your attorney and does not review information you provide to us for legal accuracy or sufficiency.
James Gilmer is a Compliance Specialist at Harbor Compliance, a leading provider of compliance solutions for companies of all types and sizes. Founded by a team of government licensing specialists and technology trailblazers, Harbor Compliance has helped more than 25,000 organizations apply for, secure, and maintain licensing across all industries. James is passionate about helping nonprofit organizations leverage compliance to enhance their fundraising and program activities and educating the sector on compliance issues.