There are two important considerations companies have to take during the early stages of forming a business: the location and the business entity structure. These decisions will have an impact on the management and taxation of the company.
Why Choose Hawaii
The location of the business will affect a lot of aspects. Since each state has its own laws and regulations for business entities, the obligations, responsibilities, and requirements will vary.
For many startups, the owner’s place of residency is the most obvious option. But it is also possible to organize the business in the state that offers the most benefits and suits the needs of the company.
Aside from being a tourism hotspot, Hawaii offers a good environment for new businesses. Here are some of the advantages that make this state appealing:
- Location – While the state seems isolated due to its geographic location, Hawaii provides access to North America and Asia. So it is a strategic area that offers a connection between Eastern and Western cultures.
- Multicultural Population – The accessibility of this state to both the East and the West makes it home to a multicultural population. Many companies operate in Hawaii to test products and business models before entering major U.S. markets. It also gives access to insights into Asian markets.
- Taxation – Dealing with taxes makes running a business a bit challenging, but the tax laws in Hawaii can be beneficial to startups. That is because the state levies no stock transfer tax, personal property tax, and unincorporated business tax. It is among the few states that do not impose taxes on inventories, equipment, furniture, and machinery. There is also no tax levied on manufactured goods that will be sold outside of the state. Additionally, products and services exported to other countries are exempt from the General Excise Tax (GET).
- Low Cost Of Doing Business – Compared to other major cities in the U.S. and Asia, the cost of doing business in Hawaii is much less.
- Talented Workforce – The team that works for a company plays a huge role in determining the success or failure of the business. Hawaii offers access to skilled and talented workers with college degrees.
- Programs And Incentives – To help companies, the state offers various programs and incentives such as loans, grants, and investment sources. Among the most beneficial programs is the Enterprise Zones Partnership Program, which aims to increase business activity, job creation, and job preservation. Business entities that qualify for this can have an exemption from GET on the gross proceeds for seven years. It is also possible to get the nonrefundable income tax credit, which is 80% of the tax liability in the first business year.
Start A Hawaii LLC
After choosing where to organize the business, startups will have to figure out which business entity structure is most suitable for them. For many new businesses, the best option is the limited liability company (LLC).
This structure has two main features that make it attractive, especially to first-time entrepreneurs. First, it offers asset protection. Like in a corporation, the owners of an LLC will not be personally liable for any debts and actions of the business. At the same time, LLCs can also operate as pass-through entities in terms of taxation. Similar to a partnership, the profits of the LLC will be passed through to the owners, who are called members. The members will then report the profits and losses on their individual income tax returns.
Understanding Hawaii LLC
To further understand what an LLC is, business owners should know the following principal characteristics it has:
- The company is a separate entity.
- There is no need to conduct annual meetings or follow the operational restrictions imposed on corporations.
- There is no limit to the total number and type of members.
- The owners can participate in managing the operations of the company.
- There are reporting and tax obligations.
- An LLC can have one or more members.
Here are some of the benefits that LLCs offer:
- The structure limits the personal liability of owners.
- Transfer of ownership is not complicated.
- Business operations can continue beyond the owner’s lifetime.
- Members do not have to be U.S. citizens or permanent Hawaii residents.
Types Of LLCs
Before starting a Hawaii LLC, it is necessary for startups to understand that there is more than one type of LLC. Companies will have to choose which is suitable to their activities.
In Terms of Home State
1. Domestic – LLCs organized and are doing business in the state are domestic business entities. This means that the company is registered under the jurisdiction of the state government.
2. Foreign – LLCs that originally organized and registered their business in a different state will have to register as foreign business entities in Hawaii should they wish to transact business in the state. To learn more about the process, read our article on Hawaii Foreign Qualification.
In Terms Of Management Structure
1. Member-Managed – The state allows members to manage the operations of the LLC. In that case, the company will be a member-managed LLC.
2. Manager-Managed – LLCs that wish to give the responsibility of handling the day-to-day operations of the business to one or more members or a hired professional can choose to be manager-managed. That means that some members will be passive owners.
In Terms Of The Number Of Members
1. Single-Member – If there is only one owner, the company will be a single-member LLC. It will be a disregarded entity by default when it comes to taxation. In that case, it will be taxed similar to a sole proprietorship. The sole owner will have asset protection and will not be personally liable for the debts of the company.
2. Multi-Member – Those with more than one member will be multi-member LLCs. The members will have asset protection as well. In such cases, the company will be taxed like a partnership. They will be reporting taxes for the income that they get from the company on their personal returns.
To avoid disagreements and disputes among members, multi-member LLCs should create a carefully laid out operating agreement. This internal document will define the duties, powers, and obligations of the members. To find out more about this paperwork, check out this article.
Unlike other states, Hawaii does not allow the formation of series LLCs and professional LLCs.
How To Get Started
Forming an LLC in Hawaii comes with many benefits. However, it also involves certain obligations. First, the state requires registration of business. That includes the submission of formal paperwork, which is called the Articles of Organization. It comes with a $50 filing fee.
It is also necessary for LLCs to comply with state laws. For instance, the company name should be distinguishable. That means startups cannot have a name that is already being used by another entity in Hawaii. To ensure this, consider doing a name availability check.
Additionally, company names should include a proper designator. It can be the phrase “Limited Liability Company” or any of its abbreviations like “LLC” or “L.L.C.” Business entities also cannot use any term that could confuse them with any government agency.
Another requirement is the nomination of a registered agent to serve as the point of contact of the company with the state. It will accept all legal correspondence and business mail on behalf of the company. It can be an individual or a third-party organization like DoMyLLC. For individuals, they should be at least 18 years old. Meanwhile, commercial registered agents should be authorized to do business in the state. To get additional information about the qualifications for a Hawaii registered agent, read this article.
To learn more about the process of forming an LLC in Hawaii, check this simple step-by-step guide. It would also help to consult with experts. Our team at DoMyLLC can provide personalized solutions that include the handling of the business formation process. We can serve as a registered agent in Hawaii too.
With our help, companies can ensure compliance with state requirements and obligations to prevent any issues in the future and be able to focus on growing the business. Contact us now to find out how we can help you streamline state processes.
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