Amongst small business owners, a limited liability company is a popular choice for protecting liability, the flexibility of management, and the tax advantages this type of business entity offers. In case you are willing to start an LLC, you must understand the benefits, disadvantages, and other essential topics of an LLC. In this article, we will cover what an LLC is and how you can start an LLC.
What is an LLC?
A business structure that provides limited liability protection and pass-through taxation is a limited liability company (LLC). When it comes to corporations, the LLC exists as a different entity from its owners. Consequently, owners cannot be held individually responsible for the business debts and liabilities. The LLC permits pass-through taxation because, at the entry-level, the income is not taxed. However, one must complete a tax return for the LLC in case the LLC has more than one owner. In an LLC, any income or loss is kept under the eyes of the owners. The company owners are also members that must report the income or loss on their personal tax returns and pay any necessary tax.
Benefits of forming an LLC
A few of the benefits are mentioned below:
- Flexible membership – Members of an LLC can be individuals, partnerships, trusts, or corporations, and there is no limit on the number of members. S corporation has been elected to be taxed as a pass-through entity and is considerably more restricted in who can be a shareholder. There is a maximum limit on the number.
- Limited liability – Members of an LLC are shielded from personal liability for acts of the LLC and its other members. To pay business debts, creditors cannot pursue the personal assets of the owner, such as a house, savings accounts, and many more to pay the debts of the business. The sole proprietor’s assets and general partners, on the other hand, can be pursued against the business’ debts.
- Management – Members of an LLC can handle the LLC or choose a management group to do so. On the other hand, corporations are managed by a board of directors and not shareholders.
- Heightened credibility – Commencing an LLC may support a new business build credibility more than in case the business is working as a sole proprietorship or partnership.
- Pass-through taxation – At the business entity level, LLCs do not pay taxes. Whatever the business income or loss is, it is “passed-through” to owners and reported on their income tax returns. All those tax due is paid at the individual level. Corporations that cannot or choose not to be taxed as an S corporation are taxed at the business entity level, and their shareholders are taxed on the income distributed to them.
Disadvantages of creating an LLC
There are a few disadvantages to developing an LLC, too, although the advantages outweigh the drawbacks.
- Cost – The cost of an LLC is usually more to develop and sustain than a sole proprietorship or general partnership. States charge an initial formation fee. Many states impose ongoing fees, like annual reports and franchise tax fees.
- Transferable ownership – Ownership in an LLC is usually more complicated to transfer than with a corporation. With corporations, shares of stock can be sold by the corporation to increase ownership. Unless there is a shareholder agreement, the shareholders can sell their shares to someone else. Typically, with LLCs, unless the members agree otherwise, all members must support adding new members or modifying the ownership percentages of existing members.
How to form an LLC?
Forming an LLC can be a big task, in order to assist you in creating an LLC successfully and in compliance with state law follow the following steps:
Step 1: Choose a State in Which to Form Your LLC
You can choose to form an LLC in any state even if the LLC isn’t actually conducting any business there. Many LLC owners choose to form an LLC in the state where they plan to do business which eventually is the state they live in. One aspect that you plan to choose a state to note is taxation and LLC laws. The laws differ from the state, making some states more advantageous. Therefore, be cautious of the laws when choosing your preferred state.
Step 2: Determine a name for your LLC
To form an LLC, you will have to select the name that is not already on the Secretary of State’s records as being the name of another domestic or qualified LLC or other business entity. Numerous sole proprietors work under a registered “doing business as” (DBA) name or trade name. It may also want to use that as their LLC’s legal name.
To ensure the availability of the name you want for your LLC, whether it’s registered as your DBA name or not, you should conduct an LLC name search on your formation state’s website to determine whether your desired name is available. If you are not ready to file your LLC formation document quite yet, it is an excellent idea to reserve the name. Many states allow you to do that for a small fee and a short time period. It’s also a great idea to convey a trademark search of the name to avoid intellectual property infringement or confuse your consumers.
Step 3: Choose a registered agent
In order to transact a business, you will need a registered agent. A large number of new business owners are either unfamiliar with the term registered agent or do not know the meaning of a registered agent.
A registered agent is also known as a statutory agent is an agent who processes and receives critical legal notices and tax documents on behalf of an LLC. These consist of important documents and communications mailed by the Secretary of State and tax documents sent by the state’s taxation department. A registered agent also needs to be available to receive service of process, which are legal documents. Typically a summons and complaint that present notice that a lawsuit has been filed against the LLC. In case the registered agent is unavailable when these time-sensitive documents are presented, or if the person receiving them harms them, it can cause the LLC serious problems. It is important that a registered agent must also have a physical address in the state and cannot use a P.O. Box.
Step 4: Provide an LLC Operating Agreement
As the name indicates, the operating agreement is an agreement among the members and between the LLC and its members on how the LLC will be working. Even when you are the only member, it is essential to have an operating agreement. It shows you respect the LLC’s separate existence; it gives you a chance to put in writing what you want to happen in certain circumstances. For example:
If you can no longer handle the business and permit you to opt-out of the LLC statute’s specific default provisions, you might not want the LLC to be governed by. Multi-member LLCs need to have a well-drafted operating agreement. This document will spell out the division of ownership, labor, and profits and often heads off discussions among the owners. It should detail, among things, who has authority to do what, what vote is required to approve certain transactions, how one can transfer membership interests, how one can add new members, how distributions, profits, and losses will be split, and more. It is recommended that your attorney review the operating agreement to be sure that all the bases are covered.
Step 6: Get an EIN
Once the business entity has been determined, you need to contact the Internal Revenue Service for an employer identification number (EIN). Your LLC will use the identification number on all its bank accounts, income, and employment tax filings. Additionally, in each state in which the LLC will be doing business, you should apply to the state’s tax department for a sales tax identification number and register with the state’s labor department.
Need Any Help in Forming Your LLC?
Now that you know all about forming an LLC, follow all the above steps to form an LLC. In case you experience any difficulties it is better to consult IncParadise and get things done correctly. Therefore, feel free to contact us in order to form your LLC.