Choosing the business structure to use for your company is a crucial decision. You need to understand how each structure works and find out which one suits your business. In the United States, business owners have an option that offers many advantages. You can start your business by forming a limited liability company (LLC) and completing the correct LLC paperwork.
Forming An LLC And The Required LLC Paperwork
An LLC is a hybrid business structure that combines the features of a corporation with the characteristics of a partnership or sole proprietorship. It is a structure that allows owners to not be personally liable for the company’s liabilities and debts. All you need to do is take care of the proper LLC paperwork to ensure registration and approval.
Regulations on LLCs vary depending on the state where one organizes the company. Many states do not restrict ownership. Thus, any entity can be an owner, also known as a member. Individuals, corporations, and even other LLCs can form one.
The requirements may vary by state. However, there are general steps that are common among states.
- Choose a name. Make sure you follow the naming regulations. Generally, you should include the phrase limited liability company or abbreviations like LLC or L.L.C. You should also not use words that could confuse your LLC with a government agency. States may also have a list of restricted words. Be sure to check this before naming your company.
- Appoint a registered agent, which may be an individual or a company. The agent will send and receive all legal documents on behalf of your LLC.
- File your LLC paperwork, which is also known as the Articles of Organization, and pay for the fees.
- Create an operating agreement. It is a legal document outlining the ownership structure and the roles of each member of the LLC. Most states do not ask LLCs to have an operating agreement. But having one can help in determining the responsibilities of each member.
- Get an Employer Identification Number (EIN). It is like the social security number of your LLC. You can use the EIN in hiring employees or opening a company bank account.
- Obtain permits and licenses if necessary. Some states may require you to secure permits or licenses to conduct your business operations.
Some people may see taxation for LLCs as a complicated thing. However, it would not be hard to understand once you know how it works. Generally, LLCs have default tax classifications. But owners can elect to be under a different classification.
- Single-member LLC
The IRS taxes single-member LLCs as a disregarded entity. The company will not have to file a separate tax return. An individual owner includes the income and expenses of the company on his personal income tax return. If the owner is another entity, they will include the activities of the business on the return of the entity.
- Multiple-member LLC
The IRS taxes multiple-member LLCs the same way it does for partnerships. Thus, businesses under this structure are subject to flow-through taxation and do not have to pay taxes. Instead, the tax will be on each owner and will depend on the shares of profits or losses.
- As A Corporation
As stated earlier, owners can elect to pay taxes as a corporation. You may have also heard of the terms S corporations and C Corporations and wondered what these mean. Generally, an S corporation works as a partnership and has flow-through taxation. Meanwhile, companies considered as C corporations pay taxes before they distribute the profits to the owners.
The IRS imposes fines and penalties for late filing. S corporations and partnerships may face higher fines. These types of business entities need to pay $195 multiplied by the total number of partners or shareholders per month. So, let’s say that a company has five partners. The total will be $975 a month. Even though the limit is 12 months, the total will still be a big amount. Aside from late filing, your LLC may also pay penalties if you do any of the following.
- Instead of an S corporation, your LLC mistakenly elected itself to be a C corporation and resulted in double taxation.
- You made payroll errors due to misunderstandings about your company’s structure.
Forming an LLC comes with a lot of benefits and advantages. However, you should make sure you understand all aspects. Research about the taxation aspect before making up your mind. Consult with an expert, such as DoMyLLC, to make sure you do all steps properly and comply with the regulations that your state has set for LLCs.