When it comes to forming a business, among the most important decisions that companies have to make are those that they have to deal with early on. Those include the business entity structure.
The LLC Structure
A popular choice for startups is the limited liability company (LLC) structure. The benefits that it offers make it an appealing option, especially for emerging entrepreneurs.
Generally, an LLC is like a cross between a partnership and a corporation. Its main features combine the advantages of those two types of business structures.
It offers asset protection so that the owners, who are called members, will not be held personally liable for the actions and possible debts of the company. At the same time, it allows flexibility in taxation. The default treatment of an LLC for tax purposes is as a pass-through entity. Because of that, the company does not pay and report taxes at a corporate level. Instead, the members report business profits and losses in their individual tax returns.
Forming an LLC
Many people get intimidated when they think about forming an LLC. But the truth is that it is a lot easier than what some may think. While the process depends on the laws of the state where the company operates and wants to register, there are some basic steps you can easily accomplish. Those include the following:
- Choosing an appropriate business name
- Selecting a registered agent
- Filing LLC paperwork
- Paying the corresponding fees
- Getting the necessary licenses and permits
To better understand the LLC registration process, check out our state-specific articles.
Another reason why many companies choose the LLC structure is it requires less legal documentation and has fewer formalities compared to a corporation. Despite that, some people are afraid of handling the paperwork. It may be due to a lack of knowledge. Others may be overwhelmed by all the details or are afraid of making mistakes.
Understanding what those documents entail may help. Here are some tips on getting started:
- Articles of Organization – Also referred to as the Certificate of Formation in some states, this is like the building block of the company. It formally registers the business with the state. It is filed with the governing agency, which is usually the Secretary of State.
The requirements to accomplish the form will also depend on the state, but these are the common pieces of information you need to provide:
- Company Name – The name of the LLC needs to be distinguishable. That is why the company has to check its availability by doing a business entity name search on the database of the state’s governing agency. The name should also have a proper designator, which can be the phrase “Limited Liability Company” or any of its abbreviations like “LLC” or “L.L.C.”
- Purpose – The statement of purpose refers to the reason why the LLC is being established. In most cases, a broad description is accepted.
- Principal Office Address – Depending on the state laws, this may be a physical street address or a mailing address for the company’s primary place of business.
- Registered Agent – All states require business entities to appoint a registered agent to serve as the point of contact between the LLC and the state. The LLC should also provide a registered office address where the agent is available during regular business hours. For a more detailed discussion on this topic, check out our article Find A New Registered Agent.
- Duration – In most cases, an LLC has perpetual existence by default. But some states allow companies to set a specific date when they will no longer be operating.
- Operating Agreement – While this paperwork is not a requirement under state laws, it may help protect the company and its members. It sets out the rights, powers, duties, and responsibilities of members and managers. It will also lay out details on the processes to run the LLC. Here are some of the things that operating agreements commonly include:
- How to make key decisions
- Percentages of ownership
- Distribution of profits and losses
- Voting rights
- What to do if a member dies or decides to exit the business
- How to dissolve the LLC
Aside from those two documents, there may be other LLC paperwork like the annual or biennial report. Some business activities and locations may also require business licenses and permits.
Dealing with paperwork can be a bit overwhelming. Fortunately, there are reliable third-party organizations like DoMyLLC that are ready to help. Contact us to find out how.