An LLC, or limited liability corporation, is a corporate arrangement that prevents business owners from being responsible for the debts or other obligations of the company directly.
It is a hybrid entity which combines the benefits of the structures of partnership and sole proprietorship. LLCs, known as LLC “members.” may be owned by one individual or by several individuals.
In most cases, an LLC offers immunity from personal responsibility by holding your personal assets protected if your LLC declares bankruptcy or is sued, such as your car, house and savings accounts.
Single-member LLCs are pass-through companies, meaning you are “passed through the gains and losses from the LLC and treated as personal income.
The advantage of this is that on your earnings, you do not have to pay both corporate and personal taxes.
Similarly, multi-member LLCs are taxed as partnerships with each owner paying personal income taxes on their share of the gain, and are also pass-through corporations.
Benefits of an LLC
In addition to liability security, an LLC structure offers several advantages for your company. There are the principal benefits:
1. Personal asset protection
You are not legally liable for the LLC’s debts or claims as long as you have not committed fraud or any illegal act as a member of the LLC.
2. Pass-through taxation
The profits of an LLC go directly to the owners, who declare on their personal tax returns their share of the profits, so the profits of the corporation are taxed only once.
For example, profits are subject to double taxation in a C-corp, meaning the company is taxed on its profits and then again when the owners declare in their tax returns their earnings from the business.
With little paperwork and few specifications, such as official officials, annual meetings, or complex company documents, LLCs are easy to build and maintain.
LLCs have few constraints on your company’s structure, ownership and management, meaning that your company can be a single or multi-member LLC, a member-managed LLC, or a manager-managed LLC.
You may also choose the taxation form that is most advantageous for your business.
Credibility brings credibility to the formation of your company as an LLC, as LLCs are a commonly known business framework that enables clients to know that you are serious and competent about how you run your business.
6. Access to business loans
You can begin building a credit history after your LLC is established, which will allow you to access business loans and lines of credit to help you grow your business further.
7. Flexible distribution of profit
LLCs can choose how they distribute income to the owners; the distribution does not have to be equal or proportionate to the percentages of ownership between members.
How to start an LLC
There are a few steps you have to take to get you to your target once you’ve decided to continue forming your company as an LLC.
1. Choose your state.
As an LLC owner, the first thing you have to do is pick the state you are going to run your LLC in.
The most reasonable choice for most new business owners is to form an LLC in the state where you live.
If your company has a physical presence in other states i.e. a storefront or office), you may need to file in each state where you intend to do business with a foreign LLC.
There are some circumstances where you may want to create your LLC in a different state from where you live.
A few states have business-friendly rules, such as Delaware and Nevada, that may attract potential LLCs.
However it may incur expensive fees and additional paperwork to register your LLC in another state (or several states).
2. Give your LLC a name
It’s time to choose a business name after you’ve decided where to set up your business. For company names, each state has different laws, but you should expect to obey these guidelines in general:
The term “limited liability company” or an abbreviation must be included in the name (LLC or L.L.C.).
The name cannot include terms that could confuse the organization with a government entity (FBI, Treasury, CIA, etc.).
Further paperwork and the inclusion of a licensed person, such as a doctor, to be part of your LLC may be needed for restricted terms such as “bank,” “attorney” or “university”.
3. Select a licensed agent.
A individual or other business that sends and receives legal documents on your behalf is a registered agent.
These records may include legal summons or document filings that will be obtained and sent to you by your registered agent.
Most states require a licensed agent to be used by LLCs, and the agent must be a citizen of the state you are doing business in.
4. File with your state.
Registering your LLC with the state will be your next move.
The formation document is referred to as the “articles of organization,” in most jurisdictions, but it can also be referred to as the “certificate of formation” or “certificate of organization.”
This document is what formally establishes your LLC, along with your state filing fee. Your documents can be submitted by mail or online.
You will need to have the following alongside your certificates:
- Complete names and contact details for all of the LLC founding members
- The name of the company
- The LLC’s address (If your company has multiple addresses, you will need to determine a primary address for official mail and tax purposes.)
- Period of the life of the company
- Details about the agent being registered
- Details on the LLC, including a mission statement and intent description
5. Determine the system of management.
As an LLC, you have the capacity to select how the management of your organization will be organized.
You may have the business managed by members, which means that there are a small number of LLC members who are all involved in the company’s day-to-day operation, or manager-managed, where members do not want to be involved in managerial matters and put the authority in the hands of one or more) managers.
6. Establish an operating arrangement for the LLC.
An operating agreement for the LLC is a legal document that describes the LLC’s ownership structure and member responsibilities.
Officially, most states do not need an operating agreement, but putting it down on paper can also be helpful. In an operating agreement, below are some of the sections:
Organization: This chapter explains when and where the business was formed, who the members are and the arrangement of ownership.
Management and voting: This chapter explores how the organization is run and how decisions are taken.
Capital contributions: This is where you’re going to determine which members help the LLC financially and shape a plan for how more funds can be raised in the future.
Distributions: This illustrates how the gains and expenses of the company are split amongst the shareholders.
Dissolution: The conditions under which the LLC may be dissolved are clarified in this section.
7. EIN Number
An EIN, or Employer Identification Number, works like your LLC’s Social Security number.
To hire staff and open business bank accounts, you will need an EIN.
From the IRS website, or by fax or mail, you can get an EIN free of charge.
8. Document for doing business in other states.
Eventually, it is likely that your LLC will conduct business across state lines. Therefore in other nations, you need to ensure your company is eligible.
Your LLC has to qualify in every state where it performs substantial business after you are licensed in your company’s home state, the state where you will pay taxes.
States differently describe “significant business”.
However a physical office or storefront usually requires qualification, as do sales totaling more than $500 in the state. This is regarded as qualifying abroad.
For each state where you conduct business, you will need to familiarize yourself with the criteria for LLC qualifying.