EVERYTHING YOU NEED TO KNOW ABOUT FORMING AN LLC
LLC is short for Limited Liability Company. An LLC is a business
entity that can be formed in any of the 50 United States. It is neither a corporation
nor is it a sole proprietorship/partnership.
Instead, you get the best of both worlds by combining the two. An LLC offers the simplicity
and flexibility of starting a sole proprietorship while providing you with the limited
liability enjoyed by corporations.
The main benefit of creating an LLC is that limited liability thing, it means that the
business is separate from you as an individual (unlike in a sole proprietorship).
Therefore, for the most part, your personal assets are protected against losses, debts or
liabilities. For example, if the LLC gets sued or goes bankrupt, the creditors can't
come after your personal assets because the LLC (not you) is the entity that owes them.
Generally, the LLC has certain bells and whistles that the other entity types do not have,
but it is very important to understand that each situation is unique, and the LLC may
not be the most appropriate entity type for your situation.
It is also very important to understand that even if the LLC is the most appropriate entity
type for your situation, you should understand the features and procedure of forming an LLC.
Here are some features and procedure of forming an LLC:-
? FEATURES:-
¦ LLC - TAXES:-
For tax purposes, the LLC is like a chameleon it can present itself to the IRS in different forms.
In some circumstances, it makes sense and is permissible to make a tax election to have
your LLC taxed as an s-corporation. Under limited circumstances, it can make sense and
is permissible to make an election to have your LLC taxed as a c-corporation.
By default, an LLC that consists of one member is taxed as a sole proprietor and an
LLC that consists of more than one member is taxed as a partnership.
As a general rule, an LLC in of itself does not open a door to previously closed
opportunities to claim certain tax deductions. Any income tax deductions that are
otherwise available to your business under the tax code are available whether or
not your business is operated out of an LLC.
The LLC as an entity does not pay income taxes, but rather, any tax due is paid by
the members of the LLC on their respective tax returns at their personal tax rates.
Contrast that with a c-corporation where income taxes are paid by the business and
its owners/shareholders.
¦ PERSONAL LIABILITY FOR MEMBERS:-
For liability purposes, the LLC serves to protect the members from being personally
liable for the debts and liabilities of the LLC the only risk/liability for a member
is if the business fails, they may lose the investment/contribution(s) made to the LLC.
However, an LLC cannot protect its members from a members personal guaranty on a loan,
fraud, or negligent rendering of professional services.
¦ MANAGEMENTS LIABILITY:-
The LLC manager is also not liable for the debts and liabilities of the LLC so long as
the manager acts within the scope of her duties as manager and does not commit fraud or
sign a personal guaranty on a loan. Contrast that with a limited partnership,
in which the person managing the business, i.e., the general partner is exposed to the
debts and liabilities of the business.
¦ PRIVACY:-
For privacy purposes, in certain states, the identifying information of the members of
the LLC is kept from the public record. For those who place a high priority for privacy,
this can be a way to achieve that.
? PATH#1:- STEPS FOR FORMING AN LLC:-
The procedures for forming an LLC vary slightly by state,
but there are some general principles that apply.
¦ CHOOSE A NAME:-
The rules on this vary slightly state to state, but typically the name:
Cannot be the same as another LLC on file in that state.
Must end with an LLC designator, e.g. LLC, L.L.C., or Limited Liability Company.
Cannot include prohibited words, e.g. bank, insurance, corporation, or city
(these vary state to state).
To find the rules in your state, you'll want to check the website of the LLC division.
This is usually part of the Department of Corporations or Secretary of State.
LLC rules in each state
Once you've chosen a name that meets the rules, you have to make sure that it hasn't
already been taken in your state. To do this, many states will let you search their
online database for free. If not, they’ll have a process where you can search your
desired name for a small fee. If you need time to file your documents, and you are
concerned that someone will take your name, most states have a solution.
And will allow you to reserve the name for a period of time for a small fee,
while you prepare your filing documents.
While the requirements of your state might be fairly simple to comply with, you must also make sure that your name won’t infringe on another company’s trademark. To check the availability of a trademark, you need to perform a detailed trademark search (screenshot below).
¦ ARTICLES OF ORGANIZATION:-
The first document you need to file with your state officials is often called
articles of organization. Some states call this document a certificate of formation
or certificate of organization. Regardless of the name, this document is what
legally creates your LLC in your state. This document is usually simple.
It requires you to enter your LLCs name, its address, and in some states the
names of the owners. (The business owners go by the legalese name of members).
If the LLC has more than one member, some states require all the owners to sign
this initial filing document.
When you submit this initial filing document, you'll also have to pay a filing fee.
This amount varies, some states like California are $70, but Massachusetts is $500.
This filing fee is often listed on your articles of organization or can be found on
your states website (theres a listing of LLC requirements for each state screenshot above)
¦ APPOINT A REGISTERED AGENT:-
On either your initial filing document or on a later document, you will be required to
appoint a registered agent or agent of service of process. This person will be listed
on your LLCs public record. A registered agent is a person/business that will receive
legal paperwork for the LLC. This might be because the LLC is being sued, or a lawsuit
is threatened. Many states will allow one of the members to function as the registered agent.
However, not all states do; so check the restrictions in your state before appointing
a member as the registered agent. (See your states requirements screenshot above).
In many states this address must be a physical address; it can't be a P.O. Box or a
Private Mailbox. If you are in one of these states, and you work from home, an option
is a registered agent service. They will allow you to use their address and forward
any documents they receive.
¦ PUBLISH YOUR LLC NAME:-
In a few states to finish creating your LLC, you must publish a legal notice.
This is done for several consecutive weeks in a newspaper. Once you've done this,
the newspaper will give you an affidavit of publication to submit.
¦ OPERATING AGREEMENT:-
Even though only a few states require operating agreements, all LLCs should have one.
An operating agreement outlines the rules, boundaries, and expectations between the
business owners. It also pre-determines outcomes if specific situations arise.
For example, your operating agreement should spell out:
What percentage of the business each of you owns.
Each owners contribution to the business (financial, property, or hard work).
How profits (and losses) will be shared.
The roles and responsibilities of each of the members.
How owners will vote on business decisions.
Who will manage the LLC on a day-to-day basis and what they have to consult with the owners about.
When meetings must be held and what can be voted on at those meetings.
What happens if one of the members dies, becomes disabled, or wants to leave the business.
How an owner can be forced to sell his/her interest in the business.
¦ EMPLOYER IDENTIFICATION NUMBER:-
Now that you have a new business, you need to let the IRS know about it and pay your taxes.
Therefore, you should go ahead and apply for the LLCs very own Employer Identification Number
especially if your LLC has more than one member! Since the IRS does not recognize an LLC
as an official tax classification, you will also need to decide whether you want your
business to be taxed as an S-Corp, Partnership, or Sole Proprietorship/Disregarded Entity.
There are tax advantages and disadvantages to all of them, so be sure to do your due
diligence before deciding. Get new EIN number here (screenshot below)
? PATH #2:-STEPS FOR FORMING AN LLC
There are several online businesses that offer to help you create your new LLC for a fee.
Places like LegalZoom can save you time and hassle. All you have to do is complete a
simple online questionnaire, and they will complete and file all of the necessary paperwork
for you. So, if you want to make LLC formation as easy as possible, click on LegalZoom
link below to get started. Starting your own LLC is easy, and it can help protect your
personal assets if your business ever gets sued. So, do it yourself or check out
LegalZoom (screenshot below) to get started today!
? CONCLUSION:-
Compared to a corporation, a partnership (general or limited), or a sole proprietorship,
an LLC is still a relatively new form of doing business.
Its popularity has grown quickly and is outpacing these other, older entity types.
An LLC requires less record keeping and there is less start up costs as compared to a
traditional corporation. Profit sharing within an LLC is much easier than within a
corporation. If you have other LLC members, you can decide amongst yourselves how to split
up responsibilities and profits. An LLC isn’t recognized by the federal government as a
separate taxable entity, LLCs must actually file as a corporation, partnership or
sole proprietorship tax return. Some LLCs are automatically classified and taxed as a
corporation by federal tax law.
DISCLAIMER:
This article does not create an attorney-client relationship. The author is not liable
for any losses or damages related to actions of failure to act related to the content
in this article. If you need specific legal advice, consult with an attorney who
specializes in your subject matter and jurisdiction.