What is a limited liability company LLC?
Limited liability companies, or LLCs, provide business owners with liability protection, less cost, and less complexity than a corporation. LLC owners have flexibility in managing their business and how it will be taxed. This makes it an appealing choice for small business owners.
Learning how to start an LLC isn't difficult, but there are steps to follow and things to think about along the way. Here's a seven-step approach for starting an LLC and starting it on the right foot.
- Form an LLC in seven easy steps by selecting a unique name, appointing a registered agent, completing and filing the necessary paperwork, creating an operating agreement, and obtaining tax ID numbers.
- Acquire essential licenses/permits to legally operate the business and maintain compliance with state regulations for long-term success.
- Consider the benefits/drawbacks of LLCs vs. other entities. Evaluate DIY or professional formation approach based on individual needs and budget.
Step 1: Choose a name & register it
One of the first steps you'll take when you create an LLC is to choose a name for it. Although state laws vary, your LLC name generally:
- Must be distinguishable from other business entity names already registered with the state. You can search for business name availability on the state agency's business filings website.
- Must indicate that the business is a limited liability company by including the words "limited liability company," "L.L.C.," or “LLC" at the end of the business name. Other words or abbreviations may also be acceptable, depending on your state.
As the first impression of your LLC, selecting the right name is paramount. A unique, memorable, and appropriate name can set your business up for success. But it's not just about branding—your LLC name must also meet specific state requirements, which can vary depending on the type of LLC owner. For instance, the name should clearly indicate the services offered, must not be deceptive, and should reflect the business entity type.
When selecting an LLC name, consider the following:
- The availability of a trademark and the risk of infringing upon another company's trademark
- Avoid names that are difficult to spell or pronounce
- Avoid names that have negative connotations
Most states allow you to reserve a name temporarily if you've chosen an available name but aren't ready to file LLC formation paperwork yet. Submit your state's name reservation form and the required filing fee to reserve a name. Rules, fees, and forms vary by state.
Choosing an available name is only one part of the business naming process, says Emily Grubman, owner of Title Case naming consultancy. Grubman advises looking at trademark availability once you know the LLC or brand name you want to use. "The biggest hurdle when you want to grow your business is, 'Can we get this name from a trademark perspective?'" she says. Even if you don't plan to apply for trademark protection, your name might infringe on another company's trademark. "The last thing you want to do is to have to rename your business down the line."
Grubman notes that many LLCs operate under a "doing business as," or DBA, name. Knowing you can pick a DBA that meets your marketing and trademark needs can relieve some of the pressure of picking the perfect business name when you start an LLC.
"I always say the first principle of naming is, 'Do no harm.' It shouldn't hold you back or cause you problems or make things any harder than they need to be," Grubman says. That means names shouldn't infringe trademarks or be hard to spell or pronounce. "The other aspect is making sure there are minimal negative connotations. In terms of an LLC name specifically, that is the name that will show up on your contracts and your invoices, so you might want to opt for something a little more serious" and save quirky, off-color, or funny names for a DBA.
Securing a domain name
With the digital world's evolution, a domain name matching your LLC's name plays a pivotal role in building a robust online presence. A matching domain name enhances your brand identity and provides you with a personalized email address that contains your company's name, further bolstering your professional image.
Don't forget the importance of domain privacy services, which help protect your personal information from public exposure. To safeguard your trademark across multiple top-level domains (TLDs), register your trademark in each TLD, ensuring that no one else can use it.
Step 2: Choose a registered agent
A registered agent (also known as a resident agent or statutory agent) has one job: to receive legal documents, such as lawsuits and subpoenas, on behalf of your LLC and then deliver them promptly to the appropriate person at your business.
Every state has its own requirements for who can serve as a registered agent, but typically, the registered agent services must be either (1) a state resident over the age of 18 who has a physical address in the state (known as the "registered office''), or (2) a company authorized to provide registered agent services in the state. In most states, you can act as your own registered agent, name an employee or other individual as an agent, or hire a registered agent service.
Your LLC might need to hire a registered agent in some situations. For example, if:
- Your business doesn't have a physical presence in the state of formation
- No one is available at your business location during regular hours
- You run a home-based business and don't want your personal address appearing in public records
There are numerous advantages to using a professional registered agent service. Some of these advantages include:
- Greater flexibility, as you won't need to worry about missing time-sensitive notices
- Protection of your privacy, as their address is used in public records instead of your own
- Access to expert advice and guidance on legal matters
- Assistance with compliance and ensuring that you meet all necessary requirements
Step 3: Prepare an LLC operating agreement
An operating agreement is a vital document that outlines your LLC's operational and financial procedures, including details on the business structure, ownership interests, and profit division. Even if not legally required, developing a detailed operating agreement is vital as it clarifies the management, financial rights, and responsibilities of LLC members.
Creating an LLC operating agreement independently may be suitable for single-member LLCs, but engaging a qualified attorney for LLCs with multiple owners is advisable. The operating agreement should outline the powers and responsibilities of the LLC's members and managers, the distribution of profits and losses, and the procedures for buyouts or dissolutions.
Having a comprehensive operating agreement offers several benefits:
- It helps to avoid potential conflicts among members
- It provides an additional layer of personal liability protection
- It ensures a smoother operation of your LLC
- It safeguards your personal assets
Step 4: File LLC articles of organization
After choosing a unique name and appointing a registered agent, you can proceed to handle the paperwork. At this stage, you might consider using online LLC filing services to form an LLC, streamline the formation process, and ensure all documents are accurately submitted. The necessary formation documents for an LLC may be referred to as "articles of organization," "articles of incorporation," "certificate of information," or "statement of information." You officially create an LLC by filing articles of organization with your state. The articles typically include the following information:
- The name of the LLC
- The address of the LLC's main place of business
- The duration and purpose of the LLC
- Whether the LLC is managed by its members or a manager
- The name of the registered agent and address of the agent's registered office
- The signature of one or more of the LLC's organizers
- Almost all states allow you to file articles of organization online. Filing fees vary by state, usually between $50 and $150, with a handful of states charging more than $200.
To complete the process, follow these steps:
- Research the appropriate state agency where you need to file the paperwork. This is often the same website where you researched your business name.
- Complete the necessary paperwork according to the instructions provided by the state agency.
- Pay the filing fee, which can be done online or by mail.
Some states process LLC articles of organization instantly, while others take a few days to weeks. In some states, you can pay an extra fee to expedite processing. After your LLC paperwork is approved, you'll receive a certificate of formation from the state confirming that your limited liability company officially exists.
Step 5: Get an EIN & bank account
Once your limited liability company is official, you can apply for an employer identification number from the Internal Revenue Service. The EIN is a nine-digit number that identifies your business for federal tax purposes—similar to an individual's Social Security number.
You must have an employer identification number if your LLC has employees or more than one member. Single-member LLCs with no employees can use the member's Social Security number, but your financial institution may ask for an EIN to open a business bank account. An EIN also helps protect your personal SSN.
You can get an employer identification number at no cost on the IRS website. Once you have an EIN, you can set up a business bank account and deposit company funds. Use your business account for all income and expenses, and don't mix business and personal finances. Keeping your accounts separate helps you protect your business and personal assets. You risk losing personal liability protection if you combine business and personal funds.
Securing tax identification numbers, like an Employer Identification Number (EIN), is necessary for:
- Separating your business and personal finances
- Complying with IRS requirements
- Identifying your LLC for federal tax purposes
- Protecting personal Social Security Number for single-member LLCs
- Opening a business bank account
Step 6: Obtain business licenses and permits
Depending on the type of business you have and where it's located, you may need one or more licenses or permits to operate legally. Here's an overview of some of the more common ones.
- Seller's permit. If you sell taxable goods or services in a state that charges sales tax, you'll probably need a sales tax license or seller's permit from the state. The permit allows you to collect sales tax and remit it to the state.
- General business licenses. A few states require all registered businesses to have a general business or operating license. More commonly, your city or county may require you to have a business license.
- Industry-specific licenses. Federal, state, and local governments all have a hand in regulating businesses, issuing everything from liquor licenses to occupancy permits and commercial fishing licenses.
- Registration in other states. If your business has a location other than where you formed your LLC, you'll need to register as a foreign LLC in that state.
- DBAs. In general, you need to file a DBA if you are doing business under a name other than your legal name. If your LLC only uses its official limited liability company name, it doesn't need a DBA. But if you're using a different name in your business, you'll probably need to file a DBA. DBA requirements vary by location; you may need to file with your city, county, or state.
Industry trade associations and local and state government offices are good resources for determining the types of licenses and permits your business may need.
Step 7: Get tax advice and file any required forms
Meeting with a tax adviser at the beginning of your business life can save you money in the long run. A CPA can advise you on the best tax classification, what business expenses are deductible, the kinds of financial records you need to keep, and the tax forms you'll need to file. "Having that conversation with an accountant sets things up really nicely" and avoids complications down the road, says corporate accountant Kayla Peña, the owner of Accountful Advising.
From a tax standpoint, LLCs are unique because the IRS does not have a specific LLC tax classification. By default, the IRS classifies one-member LLCs as sole proprietorships or “disregarded entities." Multi-member LLCs are classified as partnerships. But an LLC can also elect to be taxed as an S corp or a C corp by filing a federal tax election form with the IRS.
You're self-employed if your LLC is classified as a sole proprietorship or partnership. You'll report business income and expenses on your personal tax return (partnerships also file a partnership return). You'll pay income and self-employment (Medicare and Social Security) taxes on your share of business profits. Estimated taxes should be paid quarterly to avoid fees and penalties. The default taxation system is simple, especially for single-member LLCs, but some profitable LLCs save on self-employment taxes by electing S corp taxation.
In an S corp, profits also pass through to the owners' personal tax returns. But S corp owners can be company employees who pay Social Security and Medicare taxes only on their salaries, not on the company's entire profit. Salaries must, however, be reasonable for your work and the company's income. To be taxed as an S corp, an LLC must be eligible and meet election form filing deadlines.
S corporations aren't for everyone, Peña says. "You have to make sure the business is stable enough to pay your salary. You should be making a certain amount of money. Converting to an S corp comes with additional costs. You'll need to run payroll, you may have additional back tax returns and forms to file, and you may have to enroll in state workers' compensation and unemployment programs. Most small businesses don't make enough money in the early stages to convert to an S corp."
For most new businesses, Peña recommends setting up accounting software so you can track your income and expenses and understand your cash flow, income, and expenses. That's the approach she's taken with her LLC, and she now has financial data over time that can show whether it would make sense to elect S corp taxation. Every business is unique, however, and questions about tax status, reasonable salaries, and deductible expenses can best be answered by a tax professional who can look at the specifics of your LLC.
Maintaining compliance and good standing
Once your LLC is operational, it is of utmost importance to uphold compliance and remain in good standing with state regulations. This involves:
- Filing annual reports
- Paying fees
- Staying informed about your state's specific requirements
- Being aware of any franchise taxes that may apply to LLC owners
By maintaining compliance and good standing, you protect your personal assets, ensure the legal operation of your business, and reinforce your credibility with clients, customers, and partners. This diligent approach sets your LLC up for long-term success.
Maintaining a separate business bank account is crucial for protecting your personal and business assets and personal liability protection. Consider acquiring a business credit card to separate your business and personal finances further.
Keeping your LLC active and compliant with state regulations is essential to ensure its continued success and protect your personal assets from potential liabilities.
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Types of LLCs: Choosing the right structure
The success of your business hinges on selecting the appropriate LLC structure. There are various types of LLC structures available, such as:
- Single-member LLCs
- Multi-member LLCs
- Professional LLCs
- Series LLCs
Each structure offers unique benefits and considerations, depending on your business needs and goals.
Single-member LLCs are suited for individuals who want to operate a single-member LLC independently, while Multi-Member LLCs are ideal for businesses with multiple partners or investors. Professional LLCs are designed for licensed professionals, like doctors and lawyers, while Series LLCs allow for multiple subdivisions within one entity, separating different ventures or properties.
Consider your industry, the number of members, and the desired level of liability protection when choosing the right LLC structure for your business. Careful planning and evaluation of your business objectives will guide you toward the most suitable structure for your venture.
Benefits and drawbacks of an LLC
Forming a limited liability company (LLC) or a limited liability partnership has several advantages, such as personal liability protection, tax flexibility, and straightforward formation. Creating a limited liability company and forming your LLC can safeguard your personal assets from business debts and lawsuits. Also, LLCs provide various tax options, allowing you to choose the most advantageous structure for your situation.
However, there are potential drawbacks to consider when forming an LLC, including limited life, self-employment taxes, and a less established structure than corporations. Maintaining your LLC may also involve ongoing fees and paperwork, which can be cumbersome for some business owners.
Weighing the benefits and drawbacks of forming an LLC is essential for making an informed decision about your business structure. Understanding potential challenges and opportunities can help determine if an LLC is the right choice for your venture.
Comparing LLCs to other business entities
Comparing LLCs with other business structures, like sole proprietorships, partnerships, and corporations, is necessary to identify the best choice for your venture. Each business structure has advantages and disadvantages, depending on taxation, asset protection, and operational needs.
Sole proprietorships are the simplest type of business operation, but they offer no personal liability protection and may not be suitable for ventures with significant risks. In contrast to a sole proprietorship, partnerships involve shared responsibilities among partners, but liability protection varies depending on whether it's a general or limited partnership.
On the other hand, corporations offer a more formal structure with greater liability protection but are subject to double taxation and have more stringent operational requirements. By understanding the unique characteristics of each business entity, you can make an informed decision about the most suitable structure for your business.
DIY vs. professional LLC formation
When contemplating LLC formation, including a foreign LLC, you could either opt for a DIY approach or seek the assistance of professional services or a business attorney. Each method has pros and cons, and the choice depends on your unique needs, budget, and expertise.
DIY LLC formation allows you to save money and maintain full control over the process, but it can be challenging and time-consuming, especially if you're unfamiliar with state regulations and filing requirements. On the other hand, professional LLC formation services provide expert guidance, compliance assurance, and peace of mind. However, these services come at a cost, which may concern some entrepreneurs.
Ultimately, the choice between DIY and professional LLC formation depends on your needs, budget, and expertise. Carefully weigh the pros and cons of each method to determine the best option for your business venture.
Tax considerations for LLCs
As a business owner, it is crucial to comprehend the tax implications that come with forming an LLC. One of the primary tax benefits of an LLC is pass-through taxation, which means that business profits are directly reported on the owner's personal tax return without being taxed at the business level. This simplifies tax filing and ensures that business income is taxed only once.
However, LLCs also have the option to elect S corporation or C corporation taxation, which can provide additional tax benefits and flexibility. S corporations are exempt from federal income taxes, with shareholders subject to individual taxation. Conversely, C corporations are subject to corporate income tax, but they may offer more tax planning opportunities and benefits for certain businesses.
When considering tax implications for your LLC, it's essential to consult with a tax professional or accountant to determine the most advantageous tax structure for your specific situation. By understanding the various tax options available to LLCs, you can make informed decisions to help your business thrive.
In conclusion, forming an LLC is an exciting and rewarding journey that can provide numerous benefits, such as liability protection, tax flexibility, and ease of formation. By following our comprehensive step-by-step guide, understanding different LLC structures, and considering the potential drawbacks and tax implications, you can decide whether an LLC is the right choice for your business venture.
How much does an LLC cost in California?
There is no filing fee for articles of organization to form an LLC in California. However, every LLC registered in California must pay an annual $800 minimum franchise tax, even if it isn't doing business. LLCs that make more than $250,000 in California must also pay an annual fee starting at $900 and increasing proportionately to income.
Do you have to pay the $800 California LLC fee for the first year?
Under legislation passed in 2020, the $800 in franchise taxes was waived for the first year for LLCs formed between Jan. 1, 2021, and Dec. 31, 2023. The fee is also waived for businesses with a tax year of 15 days or less and did not do any business in California. After the first year, LLCs must pay franchise tax by the 15th day of the fourth month of the tax year.
Where should I form my LLC?
In most cases, the simplest and least expensive place to start an LLC is the state where you live. If you form an LLC in another state, you'll also need to register your LLC as a foreign business entity in your state. You'll need a registered agent in both states and be responsible for filing annual reports in both states. Regardless of where you form your LLC, you'll have to pay applicable taxes in the state where you conduct business.
What are the 4 types of LLCs?
Here are four types of LLCs:
- Common or ordinary LLC. This is the default type of LLC and the most common type for small businesses.
- Professional LLC. Some states require certain licensed professionals to form a professional LLC, or PLLC. PLLCs must typically get approval from a state licensing board before forming the LLC. PLLCs are restricted to practicing the applicable profession, and ownership may be wholly or partly restricted to people licensed in that profession. Professionals who might form a PLLC include doctors, lawyers, architects, chiropractors, and CPAs.
- Series LLC. A series LLC consists of a parent or umbrella LLC with one or more sub-LLCs. Each sub-LLC is insulated from the others for liability purposes. Series LLCs can be useful for companies with several businesses or investments, such as real estate investors with multiple rental properties. Not all states allow series LLCs.
- Benefit LLC. A benefit LLC has a mission to benefit society and earn a profit. Only a few states currently authorize the formation of benefit LLCs.
If you aren't sure what type of LLC you should form, get legal advice.
How does LLC liability protection work?
Owners of sole proprietorships and general partnerships have unlimited personal liability for business debts. Partners in a general partnership can also be liable for their partners' actions. When you create an LLC, you establish a new legal entity that exists separately from its owners. An LLC can have its own money, bank accounts, and assets and sign contracts. Because the LLC is a separate entity, the members are generally not personally liable for business debts or the actions of other members. They remain liable for their own negligent or intentional conduct and for any obligations for which they've signed a personal guarantee. Business insurance can further minimize liability for you and your business.
How much money should you start an LLC with?
The amount of money you need to start a new business will vary, depending on the state of your business. A business plan will help you estimate your expenses and how much money you'll need to get your business off the ground and keep it running.
There are a few costs related specifically to LLC formation and maintenance. You should have enough money to file formation paperwork, pay for legal and tax advice, hire a registered agent if necessary, and pay annual report filing fees and any annual franchise or operating taxes levied or required by law in your state.
Is owning an LLC worth it?
In most states, LLCs are inexpensive to set up and maintain. Many attorneys recommend that small business owners form an LLC because it provides liability protection at a minimal cost. But some states are more expensive than others. If you aren't sure whether an LLC is worth it, get advice from an attorney and a tax adviser.
What is the UK equivalent of an LLC?
The UK doesn't have a business entity that offers the same features as an LLC. A limited company has similar protection as an LLC. However, no UK entity has the flexibility to be taxed as a sole proprietorship, partnership, or corporation. Always get tax advice before setting up a business entity in a foreign country.
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