The state where you form your business plays a big role in determining the tax, reporting, and compliance obligations of your company. Many people choose not to organize a company in Hawaii because it is constantly ranked among the worst states to start a business. While it may be true that managing a Hawaii LLC comes with many challenges, you should not let them prevent you from pursuing your dream of becoming a business owner. After all, entrepreneurship is challenging no matter the location.
Challenges of Running a Hawaii LLC
Managing a Hawaii LLC may seem daunting. But, being ready to handle possible issues can help. Here are some of the challenges that businesses in the state often encounter:
- Economy – Compared to other states, Hawaii ranks relatively low when it comes to personal income, retail sales, the value of manufacturing shipment, farm products sold, and bank deposits. A possible reason is its dependence on imports. Additionally, the cost of living in Hawaii is high. Not only is it more than the national average, but it is also the highest in the country.
- Labor Shortage – Another issue that Hawaii businesses face is a labor shortage. Since 2017, the state has seen negative growth in its population. That includes the working-age population.
- Lack of Resources – Being an island state, Hawaii highly depends on imports. That makes it vulnerable to outside environmental and economic disturbances. So, entrepreneurs in the state often need to be more resourceful.
- Operating Agreement – Another challenge that many Hawaii LLCs face is related to internal affairs. There may be disagreements and misunderstandings among members. These may be due to the failure to create a clear operating agreement.
The state does not require you to have an operating agreement to manage a Hawaii LLC. However, having one is important to set the details on various processes necessary for business operations. Most of the time, the problems related to the operating agreement come down to wording. If the language you used in this internal document is vague, it can open doors to disagreements. Failure to include certain things in the document can also cause issues.
Among the common issues are related to the following:
- Capital contributions of each member and when should they make it
- Penalties or remedies in case a party does not make the capital contribution
- Distribution of profits and losses
- Preferences in the distribution or on liquidation
- Management structure
- Number of officers to appoint
- Voting rights
- Restrictions on transfer of interests
- Meeting procedures
- Dissolution process
- Financial Management – The financial aspect is a huge factor in maintaining a company. However, many business owners struggle when it comes to budgeting, cash flows, profit margins, and financing.
- Finding the Right Employees – Having the right staff can help you achieve your goals. However, recruiting and retaining the right team members can be hard. That can be harder for small businesses. Since the work environment is small, the different personalities of the members can affect the harmony and productivity of the team. It may also be necessary to train your employees to make sure that they have the appropriate skills for the job.
- Increased competition – Thousands of people start their own businesses every year. While they are in different industries, you may still see an increase in the number of your competitors. The ease of starting a business venture can pose a challenge to you. You may find various companies competing for every product that you sell. That makes it more difficult to retain customers and attract new ones.
- Uncertainty – You may have heard people saying that no one can tell what may happen in the future. That applies to businesses as well. There are times when things do not go as planned. No matter how careful or skilled you may be, certain external circumstances can affect your business.
Reasons to Run an LLC in Hawaii
Despite the challenges that come with managing a Hawaii LLC, forming a business in the state has its perks.
- Location – While it is true that access to resources can be a bit challenging in Hawaii, its location makes it advantageous as well. The state can be an attractive place to serve as a commercial bridge between the East and the West. Hawaii is also known as a global tourist destination. So, it is often visited by people from various states and countries.
- Multicultural – The resident population in Hawaii is multicultural. That can open many opportunities for startups. Many companies first introduce products and try business models in the state before they expand their operations in major U.S. markets. Additionally, businesses in Hawaii have access not only to the U.S. but also to some major Asian markets.
- Talented Workforce – Labor shortage and finding the right people are among the challenges that Hawaii LLCs face. However, that does not mean there is no access to talented and skilled individuals. The rate of in-migration of workers who have college degrees has been high over the last several decades.
- Business Incentives – Hawaii offers many programs and incentives to help businesses. You can get access to grants, loans, and investment resources. One of these programs is the Enterprise Zone Program. It is aimed at startup companies in the state. The goal is to promote business activity, job creation, and job preservation.
If you qualify for this, you can enjoy an exemption from general excise taxes on gross proceeds for 7 years. You can also avail of the non-refundable income tax credit equal to 80% of your tax liability in the first year.
Other programs that will be beneficial for new Hawaii companies are the foreign trade zone programs, underutilized business zone programs, workforce training funds for employers, and High Technology Business Investment Tax Credit, among others.
How To Start A LLC In Hawaii
If you think that doing business in Hawaii is right for you, then you can start by forming a company. You have to complete the registration process.
Step 1: Choose an appropriate and distinguishable name. You have to make sure that no other business entity in Hawaii uses the name that you want for your company. You will have to do a name availability check. You should also follow the naming guidelines of the state. Include the proper designator. You can use the words limited liability company or any of its abbreviations. You cannot use any term that could confuse your LLC with a government agency. If you use certain restricted words, such as the term bank, university, or attorney, you need to have a licensed individual and submit additional paperwork.
Step 2: Appoint your registered agent. All companies operating in Hawaii have to have a registered agent. You can choose an individual or a third-party organization like DoMyLLC. To understand how to select the right registered agent for your Hawaii LLC, check this article.
Step 3: File formal paperwork for public records. You have to register your LLC by filing a completed Articles of Organization form with the Department of Commerce and Consumers Affairs. Submissions can be done by mail or online. You have to pay the $50 non-refundable filing fee and $1 refundable state archive fee.
Step 4: Creating an operating agreement. As stated earlier, this document is not a requirement. However, having one can help protect you and your company. Make sure that you consider all the important factors and include them in the document. If you think you need help in creating your LLC’s operating agreement, consult professionals.
Step 5: Obtain an Employer Identification Number (EIN). The EIN is a 9-digit number that the Internal Revenue Service (IRS) assigns to identify companies for taxation. You will also need it to open a business bank account and hire employees. You can get an EIN for your Hawaii LLC for free from the IRS.
Aside from the abovementioned steps, your company will also have ongoing obligations and other reporting requirements. Failure to comply with these can lead to issues with the state. You may lose your good standing status and face penalties when managing a Hawaii LLC. To prevent this, you can get help from our team at DoMyLLC. We can also handle the business formation process and paperwork for you. You can appoint us as your registered agent as well. Depending on your needs, we can customize solutions just for you.
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