What’s the most common business filing in the United States for nearly 20 years? It’s an LLC or Limited Liability Company.
There are reasons for the popularity of LLCs. Here are three main reasons:
- Flexibility – There are options for how one is formed. There are options for setting up how it will be taxed.
- Protection – Another reason is the protection of personal assets. Just as it sounds in its name – the LLC protects each member from personal liability.
- Easy to create. You can guide yourself through a step-by-step process outlined on state websites.
We’ll begin our guide by clarifying some definitions. After that, we’ll walk you through each step of the process.
What is an LLC?
An LLC is a Limited Liability Company. Lots of people say Corporation, but that’s not correct.
A corporation is owned by individuals who buy shares, while an LLC consists of owners who contribute funds to the business.
Here’s why small business owners like the “limited liability” part of LLCs so much. Their personal assets are protected. The liability amount that could be assessed is limited to the amount of money an owner invested in the business.
Manager-Managed Vs Member-Managed LLC: What’s the Difference?
The two choices for the management structure of your LLC are member-managed or manager-managed. You must specify which one you’ll be using when you write and file your LLC operating agreement (more on that later).
If you don’t name how it will be managed, your LLC will be member-managed by default.
We asked Nellie Akalp, CEO and co-founder of CorpNet.com, to explain the differences more in-depth.
“Member-managed LLC means that all members participate in running the business,” Akalp explained. “A manager-managed LLC means that only certain members, designated nonmembers, or a combination of the two, handle running the business.”
In general, Akalp said that most multi-member LLCs choose the member-managed LLC option. With that option, all members participate in the business decision-making.
The member-managed structure is beneficial if an LLC’s members want to be actively involved in the company’s work, like producing, selling, or supporting the production and sale of the company’s products and services. A member-managed LLC would also benefit if an LLC has limited resources and does not want or can’t support a management level between the business and its owners, Akalp explained.
Manager-managed is the other option, she added.
“In a manager-managed LLC, members designate a manager or managers to oversee the operation of the business,” Akalp said. “The members typically make high-level decisions like entering contracts and signing loans but are usually not involved in the day-to-day tasks at the business.”
If the state regulations allow (more on state regulations later), members of an LLC can serve as managers, or the manager/s can be individuals hired by the LLC.
How Much Does it Cost to Start an LLC?
The main cost is the fee to file your LLC Articles of Organization with a state.
There are state fees at each step of setting up your LLC, and the fees vary from state to state. For example, the cost in Kentucky is about $50. In Massachusetts, you’ll pay $500 to start your LLC.
You can set up an LLC as a DIY or use an attorney to handle its establishment.
Here are where you will pay fees to form an LLC:
- State – Articles of organization
- State – Business licensing
- State -Permits
- Attorney – some specialize in this service.
- State – Maintaining the LLC – renewals for the state fees and for the business license fee. There may also be report fees for other required documents, depending on the state regulations.
How to Create an LLC in 10 Easy Steps
Forming your LLC isn’t difficult. There are only ten steps.
There are forms to complete, and these are available on the Secretary of State’s website. The whole process of forming an LLC can be DIY.
However, forming an LLC is a serious business venture. You may feel more confident enlisting the service of an attorney. An attorney can review those forms you’ve done and do the state filing paperwork.
1. Decide on the State in Which You Would Like to Form Your LLC
Akalp said there are many factors when it comes to selecting a state to incorporate or form an LLC. She cited the main factors for that selection:
- Money savings: business tax rates and fees vary by state. Some states are known for high filing fees as well as annual compliance fees, whereas other states are known for their business-friendly environments with lower fees to start and operate.
- Business-friendly laws: Some states, like Delaware, have a pro-business reputation when it comes to its courts. Business laws tend to be more flexible, and there are judges with expertise in corporate law who mainly hear corporate cases.
- Privacy laws: Some states require ownership to be made public, while others do not. So, if an entrepreneur would like privacy for their personal information, they may lean more towards states like New Mexico, Nevada, and Wyoming, which do not require ownership information to be made public.
2. Abide By State Law
File Articles of Organization or a Certificate of Organization, whichever is required in your chosen state. You must include your LLC operating agreement.
Follow the regulations that apply specifically to your state. A quick internet search of your Secretary of State’s website can help you get started.
3. Name Your LLC
When forming an LLC, most choose a name that is relevant to the business. You would especially want to do this if a business entity is already in operation and the name is established. You can have a name but do business by another name (DBA name).
4. Choose a Registered Agent
A registered agent can be a person or a company. Either type of registered agent will provide the service of handling all legal or government-related notices.
For example, Akalp said the registered agent has the authority to accept service of process on behalf of a business. That’s why the registered agent – person or company – must have a physical location within the state where the business is registered to operate. An individual must be available to receive a service of process.
“Most states allow someone who is at least 18 years old and a resident of the state or a company to provide registered agent services to businesses,” Akalp said. “An LLC or Corporation may not legally act as their own registered agent, but an employee or owner may play this role.”
“If one may want to act as their own registered agent, they should keep in mind that their name and address become part of the public record filed with the state,” Akalp added. “If a business is operated from home, that could jeopardize privacy concerns.”
Akalp cited potential drawbacks of being your own registered agent:
- Getting more mail that could get lost in the shuffle of non-emergent correspondence.
- Risk of not getting critical documents on time, such as legal service papers, if you plan to be out of the office for a certain amount of time.
- If you move or leave the company, you have to update your information with the state – adding one more to-do item to your list!
There are companies that act as registered agents. This may be a good idea, especially for the first year of forming an LLC. You can search the internet for companies or individuals who can be hired (for a fee) to provide agent service. You can also seek help creating an LLC by using a website like CorpNet.
5. Fill Out a Limited Liability Company Operating Agreement
The operating agreement explains how the business entity operates. It’s similar to a partnership agreement.
The operating agreement defines the business structure, detailing the purpose of the LLC and how it is designed to function.
It’s extremely important because it also spells out how the LLC is owned:
- By members
- By a corporation or S corporation
- By another LLC
- By a trust or pension plan
6. File Articles of Organization with Your Secretary of State
The articles of organization establish the rights, powers, duties, and obligations between members of the LLC. It describes what happens if a person leaves the LLC and what happens if the business closes.
The basic information that is needed includes the LLC name and street address, nature of the business, name and address of the registered agent, as well as names of members, managers, and board of directors.
Can I File for an LLC On My Own?
Yes. Your state will have fill-in-the-blank forms to make the process easy, with the fee amount named. Many people opt to hire an attorney or an LLC formation services company to guide the process. The fee to file varies by state.
7. Get an Employer Identification Number (EIN)
An EIN is an Employer Identification Number. It is sometimes called a TIN or Tax Identification Number. The EIN is used when the LLC files income tax returns with the Internal Revenue Service.
Getting an EIN or TIN is mandatory if the LLC owners intend to hire employees. An EIN or TIN is necessary to open a business bank account.
8. Publish an LLC Operating Agreement Notice
The operating agreement notice must be published in two approved newspapers. To be approved, the newspaper must be circulated in the same county as the principal address of the LLC.
9. Keep Your LLC Active
To keep an LLC active, you must annually pay renewal fees as required by government agencies. This can include the state filing fees and business registration fees.
Also, keep the LLC active by maintaining the business bank account, business insurance, and any credit cards, which should all be in the LLC’s name. Once the LLC name is official, the business owner can obtain a Federal Tax ID.
10. Register the Business in Additional States (If Needed)
You can expand the original LLC into additional states. The first registration would always be called the main LLC. The additional LLCs, using the same business name, would be termed foreign LLCs.
You would still be required to pay state filing fees as part of the cost of creating an LLC in another state. You would also be responsible for other filings and any associated filing fee, such as the articles of organization and the published operating agreement notice.
How Long Does it Take to Create an LLC?
Creating an LLC can be accomplished online in less than an hour. But, truly, you won’t be judged on speed.
Accuracy and attention to detail are important in LLC formation. You can fill out LLC documents online to create a limited liability company on a secretary of state website.
However, you should seek legal advice before you form an LLC.
Is it worth starting an LLC?
The benefits of a limited liability company LLC far outweigh the cost of forming your LLC.
So, what can you do with an LLC? Here’s the number one reason to form your LLC: It is good for people with significant personal assets.
Here’s the number two reason: Taxation.
In LLC formation, your LLC is taxed as either a sole proprietorship or a partnership. That depends on the number of members.
With one, the limited liability company LLC is taxed as a sole proprietorship. With more than one, your LLC can be taxed as partnerships, corporations, or corporations.
Income from the LLC passes through to the owner or owner’s tax return(s).
What is the cheapest way to start an LLC?
The most affordable method to start an LLC is to complete online forms on the Secretary of State website. However, the state filing fee differs from one state to another.
What does it take to create an LLC?
Let’s review how to form an LLC, step by step:
Seek guidance from an attorney about forming your LLC.
Choose a business name and get an EIN or TIN.
Search for information about the cost of the filing fee and the pros and cons of filing in various states.
Choose a registered agent.
Form an operating agreement.
File the required paperwork with the appropriate state agency.
Do the required business filings, such as public notices, and obtain permits if needed.
Is an LLC easy to form?
Since the paperwork can be completed in under an hour, one might consider the formation process to be straightforward. However, attempting it alone as an individual may not be the best approach.
Before you form your LLC, you should seek the guidance of an attorney. As a small business owner, you already know the value of giving careful consideration to a major decision.
Does an LLC Have to Make Money?
No. Income and expenses from your LLC must be reported as part of your tax return package.
If an LLC loses money, you can deduct that as a business loss.
However, if an LLC loses money for several years, the IRS may begin to view your LLC as a hobby.
What is the difference between LLC and LTD?
An LTD affords owners’ liability protections, just as an LLC does. An LTD is most commonly established in the European Union. Although they are different in name, the two types of business entities have much in common.
Should I form an LLC or LLP?
An LLC provides protection for the personal assets of its members. An LP or limited partnership provides protection for personal assets for certain members. With an LP, general members can be subject to personal liability claims.
Is an S Corp better than an LLC?
An S Corp is owned by individuals who purchase shares. An S Corp and an LLC both provide liability protection to the owner’s personal assets.
However, with an S Corp, it is possible that a court may find that the operations of the business can’t be kept separate from the assets of the shareholders. This can be the case when an S Corp is closed with business debts unpaid. A creditor or creditors may sue to collect the monies.
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This article, "How to Create an LLC" was first published on Small Business Trends
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