In this article, we will try to cover all the important points related to LLC like procedure, definition, how LLC is different from other forms of businesses, how limited liability company is formed, and a few frequently asked questions.
What is the procedure for forming an LLC?
The requirements for forming an LLC differ from state to state, and it is critical that you are familiar with the laws of your specific state before proceeding. Generally speaking, it boils down to these five fundamental steps:
Although forming a limited liability company (LLC) may appear to be a daunting and overwhelming task, it is actually quite straightforward once you have a clear understanding of how it operates.
In this article to forming your own LLC, we break it down so that you can understand everything there is to know about how to start an LLC and move forward in the most efficient and effective manner possible. Giving you the confidence and knowledge to start your own limited liability company.
1. What exactly is a limited liability company (LLC)?
Before we can get into the specifics of how to form an LLC, we must first address the following question: What is a limited liability company, and how does it work?
The Limited Liability Company (LLC) is a type of business structure in the United States that is specific to each state, in which the owners are not personally liable for the debts or liabilities of the company.
An LLC combines limited liability, similar to a corporation, with pass-through taxation, which means that, unlike a corporation, LLC owners pay taxes on profits earned by the business through their individual tax returns only, rather than being taxed at both the business and personal levels (a practice known as “double taxation.”
Because of its liability protection, a limited liability company (LLC) is an appealing option for business owners who want to shield themselves from individual liability for any business debts or lawsuits that may arise while avoiding the additional taxes and paperwork associated with forming a corporation.
When a business is formed as an LLC, it becomes its own legal entity, with all legal obligations becoming separate from the owner (s).
2. Sole Proprietorship vs. Limited Liability Company
Even though running a business as a sole proprietor is relatively low-cost and straightforward, it does not provide liability protection in the same way that an LLC does.
As a result, there is no need to file any paperwork because the business and the individual owner are not separate entities. The owner is reported on their personal tax return, and profits and losses from the business are reported there as well.
However, this could be a risky decision because it means that the business owner is personally liable for any debts or liabilities incurred as a result of the company’s operations.
The most significant distinction between operating as a sole proprietorship and operating as an LLC is the separation of personal and business affairs.
While a limited liability company (LLC) keeps its personal assets separate, a sole proprietor’s personal and business expenses are lumped together.
If someone files a lawsuit against your business, they may be able to seize your personal savings and property.
3. S Corporation vs. Limited Liability Company
An S corporation is a federal tax election, rather than a legal business entity in its own right. A C-corporation or a limited liability company (LLC) can apply to become an S-Corp.
An S corporation is similar to a limited liability company in that it protects the personal assets of its owners while also avoiding double taxation.
It is possible for a limited liability company to elect S corporation status because it can save its owners money on self-employment taxes by dividing income into two categories: salary and distribution.
Because of this, the Internal Revenue Service requires you to pay only the 15.3 percent self-employment tax on your salary and to take the remaining amount as a distribution that is not subject to self-employment tax.
Businesses with S corporation status, on the other hand, are subject to certain restrictions:
• A maximum of 100 shareholders or owners are permitted.
• Owners must be citizens or permanent residents of the United States.
• With the exception of a few rare exceptions, another entity cannot be the sole owner of an S corporation.
• There are strict administration requirements, such as the requirement of a board of directors and corporate officers, as well as regulations governing the holding of formal annual meetings, the reporting of minutes, and other related matters.
• There is only one level of taxation in the United States.
4. General Partnership vs. Limited Liability Company
You are dealing with formalities in this situation. Forming an LLC necessitates a number of specifics, including the preparation and filing of paperwork with the Secretary of State, as well as the payment of a filing fee.
When forming a partnership with another person, a much less formal agreement between the two parties is required to be signed.
Oral agreements — although this is not always recommended — written agreements, or an implied agreement, which is determined by the court and is based on the actions of the partners — are all ways that general partnerships can be formed.
When deciding between a general partnership and an LLC, there are two primary considerations to keep in mind:
• Flexibility: Unlike a general partnership, which requires both parties to share equal ownership, an LLC allows members to choose their own percentage of ownership in the business.
• Liability: Unlike an LLC, general partnerships do not provide either partner with the protection of limited liability. This means that partners are jointly and severally liable for the company’s debt.
A scenario in which one partner has the funds to cover a debt arises would result in the other partner being held responsible for the entire amount, regardless of whether or not they were at fault.
5. Limited Liability Partnership (LLP) vs. Limited Liability Corporation (LLC)
As with an LLC, an LLP provides limited liability protection, but to a lesser extent than that provided by LLCs. Members of an LLC are protected from being held personally responsible for any business debts or lawsuits as a result of the entity’s existence.
The liability protection provided by an LLP is limited to the amount of money invested directly by each partner. As a result, the business partners are not liable for each other’s actions and are shielded from liability if one of them engages in wrongdoing.
Because the laws defining and governing limited liability partnerships (LLPs) differ from one state to the next, there can be differences in the parameters of liability. You’ll need to check with your state’s legal department to see what laws are in effect.
An LLP, in contrast to an LLC, is required to have more than one owner by definition. An LLC can have one or more owners, depending on the circumstances.
For tax purposes, neither of these business structures is recognized by the Internal Revenue Service. They are both considered pass-through entities, which means that the business owners will not be subjected to double taxation.
6. C Corporation vs. Limited Liability Company
If you intend to conduct international business, a C corporation may be a more appropriate part for you to make.
One of the most significant differences between a C corporation and an LLC is the ability to conduct business operations in foreign countries.
C corporations can also secure the growth of their businesses by attracting funds from outside investors.
A C-corporation, like an LLC, provides liability protection, but it does not protect its owners from being subjected to double taxation. Corporate and personal income tax is paid by C corporation owners.
Additional distinctions include: • The ease with which shareholders can buy and sell shares makes it easier to attract investors to a corporation rather than an LLC.
• As with an S corporation, a C corporation is subject to stringent administration requirements, which include holding formal annual meetings, keeping minutes, and appointing a board of directors and corporate officers. • A C corporation is taxed at only one rate, which is lower than that of an S corporation.
For Tax Benefits of LLC please read our post.
How to Form a Limited Liability Company (LLC)
1. Choose a name for your LLC.
Following your decision to form an LLC, it is time to give your dream a name — and yes, it must be one that is unique from anyone else’s.
When naming your LLC, you must choose something that is completely distinct from the names of any other LLCs registered in your state.
The rules governing how distinctive your LLC’s name must be from others differ from state to state. Although it is sometimes sufficient to simply change the punctuation or change a word from singular to plural in order to qualify, it is usually a smoother process when the names are more distinguishable from one another.
Although not always required, one element of a business name is the inclusion of the phrase “limited liability company” or an abbreviation of the phrase at the end of the name. The acceptable abbreviations differ from one state to the next.
It is critical to conduct thorough research in order to determine whether or not your desired name is available. Google is a good resource, as is looking around on social media, but you’ll also want to conduct a business database search on the website of your state’s Secretary of State to be on the safe side.
Your LLC name must be distinct from the names of other LLCs, and it cannot be a trademark that has already been registered. Federal trademarks and state trademarks are the two types of trademarks to be aware of.
Visit the United States Patent and Trademark Office (USPTO) and conduct a search for your business name or logo to make that it has not already been federally trademarked.
Determining whether your desired name is already registered as a state trademark is more difficult because many states do not have a search engine for checking existing trademarks in their respective jurisdictions.
Fortunately, the United States Patent and Trademark Office (USPTO) has a page that provides links to the offices that oversee trademarks in each state. You can start by contacting the appropriate office in your state for more information.
Once you’ve determined that a trademark is available for use, you have the option of registering it with the appropriate authorities.
A state trademark is less expensive and much less complicated to obtain than a federal trademark; however, it restricts your trademark benefits to the state in which it is registered.
While federal trademarks are more expensive and can take longer to obtain, they allow you to use your trademark throughout the United States and provide your company with significantly more protection.
Federal trademarks may also include the ® symbol, whereas state trademarks may only include the TM (trademark) or SM (service mark) symbols (service mark).
It is possible to prevent other businesses from using the same name or something too similar by trademarking your LLC.
There is also the option of incorporating your LLC under a DBA (doing business as) name. Essentially, a DBA is just another name for your business, and it can be extremely beneficial if your LLC offers a variety of products or services.
It can assist them in distinguishing between their specific business concerns.
When it comes to naming a limited liability company, each state has its own set of rules. Many businesses prohibit the use of certain words, including those that are considered profane or obscene or that may mislead customers about the nature of the business’s operations.
The use of certain words is restricted in the majority of states, including the words “bank” and other forms of the word (including “banking” and “banker”), as well as the words “engineering,” “insurance,” and “savings.”
Depending on the state, business owners who wish to use words like these may be required to obtain a specific license and/or complete additional paperwork.
It has taken you some time to think of a name and research its availability; now it is time to think about how you will go about securing it.
You can usually reserve your desired name for a fee in order to avoid the possibility of someone else snatching it before you can officially launch your business.
Check with your state to see what steps you need to take in order to reserve your business name. Go one step further and reserve a domain name for your company website so that you can have it up and running as soon as your business is ready to begin operations.
2. Select a Registered Agent for your business.
A registered agent, in essence, serves as a point of contact between an LLC and the state in which it is registered.
This third-party individual or business entity acts as a point of contact on behalf of the business, and they are responsible for receiving things such as tax forms and legal documents, government correspondence, and notices of pending litigation.
You are permitted to act as your own registered agent as long as you have a physical street address in the state in which your LLC is formed (P.O. boxes are not permitted); however, there are advantages to using an outside registered agent service.
3. file the Certificate of Formation / Articles of Organization to the appropriate government agency.
The official name of the paperwork you must file in order to register your business is determined by the state in which you are filing it.
Articles of Organization are the most commonly used term, but some states refer to it as a Certificate of Formation or Certificate of Organization, depending on where you are in the country.
This document, whatever its name, serves a similar purpose: it is used to establish state recognition of the LLC and outline the identities of its members.
Check the website of your state’s Secretary of State to see what filing requirements are in effect, as these can differ from one state to the next.
You’ll always need the most basic information about the LLC and its members, such as the LLC’s name and mailing address, as well as the name and address of the LLC’s registered agent.
You may also be required to state the purpose of the LLC as well as the names of any current LLC members and/or managers in addition to this.
It is possible that some sections of the form will be unfamiliar to someone who is just starting out in the business world. It is possible that you will be asked whether your LLC is managed by members or by managers.
An LLC managed by its members takes on the responsibility of running the business on a daily basis and determining who is responsible for what.
In a manager-managed limited liability company, the members elect one or more supervisors to be in charge.
The location of operations, which should be the location where members collaborate, will also need to be included in your list of requirements. If the business is run from a private residence, including the address of your residence.
If your mail cannot be delivered to your place of employment, make sure to include a USPS-verified mailing address in your correspondence.
An LLC organizer must sign the form as the final and most important step before the LLC can be formed.
Then you’re ready to submit it to the appropriate party. In most states, you can complete this process online or by mail. It is possible to find specific instructions for submitting the signed form and payment on the website of your Secretary of State.
4. Obtain a copy of the Operating Agreement.
While operating agreements for limited liability companies are not required in every state, it is a wise business decision to have one in place.
Providing clear and concise definitions of all ownership terms and rules, as well as management decisions, this legally binding document serves as the basis for any legal action.
Protects the personal assets of the owners and outlines ownership percentages, responsibilities, voting power, as well as a succession plan in the event that an owner decides to leave the business.
In the event of a miscommunication or a conflict between members, having an Operating Agreement can help to resolve the situation.
Because it is not required by law to file an LLC Operating Agreement with the Secretary of State, it is advisable to keep the document safe and secure with other important paperwork once all parties have agreed on the terms and signed it.
5. Obtain an Employer Identification Number (EIN) and review tax requirements
Following the official formation of your LLC, you should consider registering it with the federal government by forming an application for an Employer Identification Number (EIN) with the Internal Revenue Service.
An EIN (Employer Identification Number) is the business equivalent of a personal Social Security number and is required if your limited liability company has more than one partner or employee.
It is completely free to obtain an EIN, and the process can be completed quickly and easily on the IRS website. When you complete the process online, the EIN is issued immediately.
In order to form an LLC, you must pay a fee.
The costs associated with forming an LLC vary from state to state. Generally speaking, the fees can range anywhere from $40 to $500 per hour or part thereof.
In most states, you can form an LLC online with a credit or debit card, or you can file it by mail with a check or money order, depending on the state.
Visit the website of your state’s Secretary of State to learn about all of the LLC filing fees that are applicable in your jurisdiction.
In addition to the filing fee, some states require additional fees for things like business fees, publication fees, name reservation fees, and other types of filing.
There are also recurring expenses that must be met in order to keep your LLC operational. These can include things like filing annual or biennial reports, renewing licenses and permits, and paying franchise taxes, among other things.
What is the tax treatment of a limited liability company?
As previously stated, one of the primary advantages of forming an LLC is the ability to avoid double taxation; however, it is critical that LLC owners understand the individual taxes that they are responsible for.
As a result, an LLC with one member will automatically be taxed as a sole proprietorship, whereas an LLC with multiple members will automatically be taxed as a partnership.
These members are regarded as self-employed and are therefore responsible for self-employment taxes on their earnings. Additionally, LLC owners have the option of electing to be taxed as either a C corporation or an S corporation, which may be beneficial to some LLCs.
Taxes on LLC business activities may also include: • Employment taxes such as Social Security, Medicare, workers’ compensation, and unemployment compensation taxes (if you have employees)
• Taxes on real estate (if you own property)
• Sales and excise taxes levied by the states
• Franchise taxes are a type of tax that is levied on businesses.
Each state has its own set of tax regulations that must be followed. Consult with your state’s Department of Revenue as well as the Internal Revenue Service to become familiar with these rules.
When dealing with tax regulations, it’s always a good idea to consult with a qualified accountant.
Additional Limited Liability Company Frequently Asked Questions
• How long does it take to form my limited liability company?
State by state, the standard processing time is two to three weeks from the time the state receives your documents, whether online or by mail; however, in some instances, it can be expedited for an additional fee in certain circumstances.
• Where should I form up my limited liability company?
It is usually preferable to form an LLC in the state in which your business is headquartered.
• Do I require the services of an attorney in order to form an LLC?
No. You are able to form an LLC on your own. There is no requirement to retain the services of an attorney.
Do limited liability companies (LLCs) receive 1099?
If your limited liability company is organized as a corporation, you will not be required to file 1099 for the business. If your LLC, on the other hand, employs independent contractors, you will be required to file 1099 forms on behalf of these individuals.
• What is the procedure for dissolving my LLC?
The procedures for dissolving an LLC may differ from state to state, so check with your state’s LLC dissolution procedures. In most cases, the timeline remains the same.
If your LLC does business in more than one state, you must file cancellations in each of the states where your LLC does business after filing the Articles of Dissolution with your Secretary of State.
You must then file your final tax return, pay any final payroll taxes, and cancel your employer identification number (EIN).
• Is it possible for an LLC to operate as a non-profit organization?
Yes, but it isn’t all that common these days. There are a number of requirements that must be met, and it can be difficult to keep track of all of the legal requirements.
When thinking about these issues, it’s always a good idea to consult with a legal and/or financial professional.