- An LLC is a corporate structure where business owners are not held liable for the company’s debts and can choose their own management structure.
- Pass-through tax is a major benefit of LLCs as profits are taxed only once.
- There are seven main steps to setting up an LLC.
- This article is for new entrepreneurs interested in learning how to start their own LLC.
One of the most important steps in starting a small business is decide on a corporate structure. There are many to choose from, each with its own benefits and features. For most small business owners, an LLC is a great choice for its simplicity, flexibility, and ability to protect personal assets. This article explains what an LLC is, its benefits, and the seven steps to take to get one yourself.
What is an LLC?
An LLC or a limited liability company is a corporate structure that protects business owners from personal liability for the company’s debts or other obligations. It is a hybrid entity that combines the benefits of partnership and sole proprietorships. LLCs can be owned by one person or several people, known as LLC members.
An LLC provides protection against personal liability in most cases by keeping your personal belongings – such as your car, home, and savings accounts – safe when your LLC declares bankruptcy or is sued.
Single-member LLCs are pass-through entities, so the profits and losses of the LLC are “passed on” to you and taxed as personal income. The advantage of this is that you don’t have to pay both corporate and personal taxes on your earnings. Likewise, multi-member LLCs are taxed as partnerships – which are also pass-through entities – with each owner paying personal income tax on their share of the profits.
Alternatively, you can choose to be taxed as a C corporation or an S corporation.
Main takeaway: An LLC is a flexible corporate structure that protects the personal assets of the owners.
Advantages of an LLC
An LLC structure offers many benefits to your business in addition to liability protection. Here are the main benefits:
- Personal asset protection: As long as you have not committed any fraud or criminal acts as an LLC member, you are not personally responsible for the LLC’s debts or lawsuits.
- Pass-through tax: An LLC’s profits go directly to the owners, who report their portion of the profits on their personal tax returns, so the company’s profits are taxed only once. For example, in a C-corp, profits are subject to double taxation, which means that the company is taxed on its profits and then again when the owners report their income from the company on their tax return.
- Simplicity: LLCs are easy to create and maintain, with little paperwork and few requirements, such as formal officers, annual meetings, or complicated business documents.
- Flexibility: LLCs have few restrictions regarding the structure, ownership, and management of your business, meaning that your business may be a single or multi-member LLC, a member-managed LLC, or a manager-managed LLC. You can also choose the tax method that is most beneficial to your business.
- Credibility: Forming your business as an LLC brings credibility, since LLCs are a widely recognized company structure that lets customers know that you are serious and professional in how you run your business.
- Access to business loans: After your LLC is formed, you can start building a credit history, which will give you access to business loans and lines of credit to help you build your business.
- Flexible profit distribution: LLCs can choose how they distribute profits to owners – the distribution does not have to be equal between members or proportional to ownership percentages.
Main takeaway: An LLC is easy to form and has few maintenance requirements. One of the main advantages of this structure is that your business is taxed as a pass-through entity.
How to start an LLC
Once you have decided to continue building your business as an LLC, there are a few steps you need to take to achieve your goal.
1. Select your state.
The first thing to do as an LLC owner is to select the state in which you will use your LLC. For most new business owners, the most logical option is to form the LLC in the state where you live. If your business will be physically present (ie, a storefront or office) in other states, you must register a foreign LLC in each state where you plan to do business.
There are some situations in which you can choose to form your LLC in a different state than where you live. A few states, such as Delaware and Nevada, have company-friendly laws that can attract potential LLCs. However, registering your LLC in another state (or multiple states) can involve expensive costs and additional paperwork. [Readrelatedarticle:[Readrelatedarticle:[Leesgerelateerdartikel:[Readrelatedarticle:How to expand your business to another state]
2. Name your LLC.
After deciding where to start your business, it’s time to choose a company name. Each state has different rules for company names, but you can generally follow these guidelines:
- The name must include the expression “limited liability company” or an abbreviation (LLC or LLC).
- The name should not contain words that could confuse your company with a government agency (FBI, Treasury, CIA, etc.).
- Limited words such as “bank,” “lawyer” or “university” may require additional paperwork and the inclusion of a licensed person, such as a physician, to be part of your LLC.
3. Choose a registered agent.
A registered agent is a person or other company that sends and receives legal documents on your behalf. These documents may include legal subpoenas or document requests that your registered agent will receive and forward to you. Most states require LLCs to use a registered agent, and the agent must be a resident of the state in which you do business.
File with the state.
The next step is to register your LLC with the state. In most states, the formation document is referred to as the “Articles of Organization,” but it may also be referred to as the “Certificate of Incorporation” or “Certificate of Organization.” This document, along with your state registration fee, is what your LLC officially creates. You can send your documents by post or online.
Determine your management structure.
As an LLC, you have the opportunity to choose how your company’s management is structured. You can have your company managed by members, meaning there are a small number of LLC members who are all involved in the day-to-day management of the company, or are managed by a manager, with members not wanting to be involved in management matters and put that power in the hands of one (or more) managers.
6. Make an LLC operating agreement.
An LLC operating agreement is a legal document that outlines the ownership structure and member roles of your LLC. Most states do not officially need an operational agreement, but it can still be helpful to put everything on paper. These are some of the sections in an operating agreement:
- Organization: This section indicates when and where the company was founded, who its members are, and the ownership structure.
- Management and voting: This section covers how the company is managed and how decisions are made.
- Capital contributions: Here you indicate which members support the LLC financially and form a structure for how more funds will be raised in the future.
- Distributions: This shows how the company’s profits and losses are distributed among its members.
- Dissolution: This section explains the circumstances under which the LLC can be dissolved.
[Read related article: Your Small Business Guide to LLC Operating Agreements]
7. Receive an EIN.
An EIN or employer identification number works like a social security number for your LLC. You need an EIN to hire employees and open business bank accounts. You can get an EIN for free the IRS websiteor by fax or post.
Main takeaway: There are seven main steps in creating your LLC. First choose a company name and the state where you want to run your business.
What to do after starting an LLC
After you start, name and submit your LLC, you need to do a few more things to get your LLC fully operational. First of all, make sure to register your LLC for state taxes. If you are selling a physical product, you must register for sales and use tax, and if you have employees, you must register with the state for unemployment insurance and withholding tax.
Then determine how you do your accounting. You can choose to do it yourself, in which case you should research the best accounting software to help you keep track of everything. You can also choose to hire a certified public accountant to help you set up or do your accounting.
If for any reason your business needs a permit, now is the time to register. Certain business activities require permits at the federal level, such as the sale of alcoholic beverages, mining and drilling, transportation and logistics, and aviation. State and local licensing rules vary.
You should also strongly consider taking out business insurance. Most states require some form of insurance, usually at least an employee benefit. General liability insurance is highly recommended as it protects your assets from litigation by covering injury, property damage, personal liability, advertising obligations and legal defense.
Finally, make sure to follow recruitment laws at both the federal and state levels. Here are the main hiring requirements:
- Employees must be eligible to work in the US
- You must report any new hires to the state.
- You must take out employee insurance for employees.
- You must withhold employee taxes.
- You must print compliance posters and place them on visible areas of the workplace.
- You must pay employees at least the minimum wage, as often as the state requires (weekly, fortnightly, etc.).
Main takeaway: After following the steps to create your LLC, your work is not done yet. There are several other actions that you as a business owner need to take to set up your business for success and safety.