If you’re entering the world of entrepreneurship and starting your own business, you have a lot on your plate, and forming your business entity should be one of the first tasks on your list. If you’ve done your homework and found that a limited liability company (LLC) is the right business entity for you, you’ll need to get your LLC registered before you open your doors for business.
Forming an LLC takes more than just registration with the state. Here, we’ll cover all the necessary steps to open an LLC.
LLC Defined
An LLC is a type of business entity that offers limited personal liability protection for its owners, who are called members. The LLC is a separate entity from its members and has its own assets and debt.
This means that the LLC is responsible for the financial obligations of the business, but the members are not. If the LLC cannot pay its debts or is sued, the LLC members are not personally liable. Personal liability protection is one of the main benefits of an LLC, making it a popular choice for entrepreneurs.
In terms of taxes, an LLC is considered a pass-through entity, meaning that profits and losses are passed through to the members of the LLC. The LLC itself is not taxed and members report the profits or losses on their personal tax return on Schedule C.
This differs from a corporation which must pay corporate taxes. Dividends paid to shareholders are also taxed, which is often referred to as double taxation.
Steps to Open an LLC
As stated earlier, opening an LLC takes more than just registering the entity with your state.
Check Your Business Name Availability
Presumably, you’ve chosen an awesome name for your business, but you’ll need to first make sure it’s available to use.
Start with your state’s business database, which is generally found on the Secretary of State’s website. You should search for the specific name you’ve chosen as well as similar names. You don’t want your business to be confused with another business in your state.
You’ll also need to check the USPTO website to make sure the name is not nationally trademarked. If not, you may want to trademark the name yourself at some point.
Finally, check a site like GoDaddy to see if the domain name is available. You should purchase the domain name that you want as soon as possible before someone beats you to the punch.
Select a Registered Agent
A registered agent is required in nearly all states. A registered agent is a person or company that is authorized by you to accept important documents and correspondence on behalf of your LLC.
You can be your own registered agent, or it can be another member of your LLC, but one of the requirements of a registered agent is that they must be available at their registered address during normal business hours.
If you’re your own registered agent, this can keep you from doing things necessary to manage and grow your business.
Choosing a registered agent service allows you the freedom to go wherever you need to go. Average costs for a registered agent service range from $100 to $250 per year.
Choose Your Management Structure
LLCs can be member-managed or manager managed.
In a member-managed LLC, all members have a role in managing the company. In a manager-managed LLC, outside managers are hired to manage the company, often in conjunction with a member of the LLC.
Some states require that you state your management structure in the documents you file to register your LLC, so you need to make this decision before your form your LLC.
File Documents with Your State
In most states, the document you’ll file is called articles of organization, while in other states it’s called a certificate of formation or a certificate of organization.
The document generally requires the business name and address as well as the registered agent’s name and address. Sometimes it requires the member or manager names and addresses, and other information.
In most states, you can fill out and file the document online on the Secretary of State’s website or a related agency website.
Fees range from $40 to $500, depending on the state.
Draft an Operating Agreement
An operating agreement, while not required in most states, is a critical document that defines ownership percentage, how profits and losses are allocated, roles and responsibilities of members and managers, and many other specifics about how the LLC will operate.
You can find operating agreement templates online, but due to the importance of the document, it’s best to retain an attorney to assist with its drafting. This is particularly important if your LLC has more than one member, as the agreement should have specific language about how disputes are settled.
Decide on Your LLC’s Tax Status
As discussed earlier, LLCs are pass-through entities by default. However, you have the option to have your LLC taxed as a C-Corporation or an S-Corporation.
In some cases, this is beneficial to you because with a corporation tax status, the company’s owners are not subject to self-employment taxes, while with a pass-through tax status, they are.
Generally, this benefit comes when the LLC reaches a certain level of income, but it’s best to discuss your options with your tax advisor. You can always elect corporation status at a later date.
Obtain Business Licenses and Permits
Various licenses and permits may be required at the federal, state, and local levels depending on your type of business and your state and local laws.
The most common is a sales tax permit which is required if you sell taxable goods and services.
Check with your state and local governments for specific requirements. You can also find online services that can assist with determining what licenses and permits you need.
Talk to Your Insurance Agent
You’ll want to protect your investment by obtaining business insurance, and you may need various types of insurance depending on your business type. At the very least, you’ll need general business insurance, but it’s best to get the advice of your insurance agent.
Get an Employer Identification Number (EIN)
An EIN is required if you’re going to hire employees or if your LLC will have more than one member. An EIN is used by the IRS to identify your company and for tax reporting purposes. Often, a bank will require one when you open a business bank account.
You can easily apply for an EIN at no cost on the IRS website.
Open A Business Bank Account
It’s important to keep your business and personal finances separate, both for accounting purposes and to keep your personal liability protection intact. The commingling of business and personal funds can blur the lines between you and the LLC as separate entities, which could threaten your personal liability protection in some circumstances.
Business bank accounts are available at most banks and sometimes come with a nominal monthly fee.
In Closing
An LLC is a great option for you as an entrepreneur due to its many benefits. Forming it takes some work, but following all the steps is crucial, so take care during the process. Often, it’s good to have your attorney and tax advisor involved in the process to make sure it’s done correctly, and that all your bases are covered. It will get you off to a great start, and then you can focus on growing your business and making money!
Article Written by: Carolyn Young
Read Also: 5 Legal Tips Every Entrepreneur Should Know
