Once you decide to be a business owner, then be ready to make many important decisions. Among them is the business entity structure that will be chosen when forming the company. Aside from the usual structures like a sole proprietorship, partnership, and corporation, American entrepreneurs have another option. They must decide if they will file an LLC. Ever since its introduction as a business entity structure, it has become a popular option for many business startups.
What It Is
Before you file an LLC, understand what it is. Generally, it is a business ownership type that combines the features of a partnership and a corporation. The owners, who are called members, enjoy personal asset protection. The company can also be a pass-through entity when it comes to taxation. Choosing this structure will allow the business to avoid double taxation.
- Limited Liability – The LLC is a separate entity. That is why the members will not be held personally liable for the debts and actions of the company.
- Taxation – The default tax treatment of LLCs is as pass-through entities. That means all business profits and losses are passed through to the members. The company will not pay corporate taxes. Instead, they report the profits and losses on their individual tax returns.
- Profit Distribution – LLCs have the freedom to select the way they will distribute profits. They do not have to opt for a 50-50 split.
- Flexibility – Managing an LLC is also easier when comparing it to a corporation. The company does not have to keep formal minutes, have resolutions, or conduct regular meetings.
Things To Remember When You File An LLC
Determine which entity structure is right for the business, then learn how to file an LLC. To help, here are some things to keep in mind:
- Choose the right state for the business. Each state has its regulations and laws governing companies, so you have to choose a state that offers the most benefits for the business. It is not necessary to form a business in the same state of personal residence. The requirements and process will also vary depending on the state. If the plan is to operate in multiple states, then you may have to register in all of them.
- Analyze funding issues. The financial aspect of a business is also an important factor that must be considered. Forming and running an LLC comes with expenses. Make sure that you are capable of covering the bills.It would help to determine how you will raise capital during the early stages. Are you using personal savings or are there investors?
- Name the company. This is not as simple as some may think. It is more than selecting a name that sounds best. There are guidelines that states require to be followed. While there may be some differences, there are general requirements that most states share.
- Include the proper designator. It can be the phrase “Limited Liability Company” or any of its abbreviations (LLC, L.L.C, L.C., LC).
- The name cannot include certain terms such as “trustee,” “bank,” or “insurance company.”
- Make sure that the company name is distinguishable. Conduct a business entity name search to check if no other company in the state is using the desired name.
- Most if not all states allow businesses to reserve a name for a specific period. That requires you to file formal paperwork and pay a corresponding fee.
- In case you want to use a name different from the one previously used in the formation documents, then register a doing business as (DBA) or fictitious name with the appropriate state agency. To find out more about this process, check out our article Getting A DBA: When And How To File A “Doing Business As” Form.
- Select a registered agent. States require companies to appoint their own registered agent. It can be an individual or a third-party organization like DoMyLLC that is willing to accept all legal correspondence and business mail on behalf of the company.
- File the formation documents. To formally register the business operations, you will have to submit paperwork to the state. This is usually called the Articles of Organization or Certificate of Formation. It is typically filed with the Secretary of State.In most cases, companies may have access to readily available forms. Other states allow a company to draft their own. Whatever the case may be, make sure to include all of the necessary information.
Here are the most common pieces of information that needs to be disclosed:
- LLC Name
- Name And Address Of The Registered Agent
- Names And Addresses Of Members And Managers
- Description Of The Business
- Signature Of The Organizer
- Create an operating agreement. This paperwork is an internal document, so it may not be necessary to submit a copy to the state. However, having one can be beneficial for the company.The operating agreement will set forth the management structure of the LLC, the processes in running it, the procedures for dissolving the business, as well as the rights and responsibilities of the members. With this, you can establish that the company is a separate entity, which will help maintain the limited liability protection that comes with the structure.
- Obtain the necessary licenses. A company may also need to acquire an Employer Identification Number (EIN) from the IRS. This is necessary for hiring employees, tax filings, and opening business bank accounts.
Depending on the industry the company is in, its business activities, and location, you may also need to obtain certain permits and licenses. Check these with local and state government offices.
Once you file an LLC successfully, the next concern is to ensure the compliance of the company with state obligations. That may require additional filings and payment of fees. If you need help, be it for forming a company or ensuring compliance, contact a reliable third-party organization like DoMyLLC.
Business Filing Section