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One of the most popular legal business structures for startup owners is a limited liability company (LLC). Many entrepreneurs choose to start an LLC due to its many pros. The name stems from the limited liability protection it offers the company’s owners, which are called members. In this organizational structure, members are deemed separate entities. This is a huge perk for new company owners looking for asset protection and minimal financial risk. For example, if the LLC is in debt, creditors can only take the business’s assets. The personal belongings (car, home, and other valuables) of individual members are exempt from seizure. As the name suggests, small business owners establishing an LLC are creating a limited liability company.
LLCs also provide more flexibility for small business owners who don’t want the formality of operating under the management rules of a corporation. Unlike corporations, there are no yearly state fees, reports, or shareholder meetings. Corporations also require owners to comply with recordkeeping laws. Following these regulations can be a tedious and time-consuming process for business owners running a startup.
Tax advantages can also be more beneficial to members of an LLC because they are a flow-through entity. This means the profits distributed to the company’s owners aren’t “double taxed.” Owners of C corporations get taxed during shareholder profit distributions, plus at the personal income tax returns level. With an LLC, owners are only required to pay income tax on their share of the company’s profit.
Ready to enjoy the benefits of this type of business structure? Start by learning the basic steps of establishing a limited liability company.
How to Set Up an LLC
1. Choose Which Type of LLC Best Fits Your Business
Step one of opening an LLC is figuring out which of the eight types you’ll select to organize your company under. The most common forms are single-member LLC, general partnership, and series LLC. Other types include: family limited partnership, restricted LLC, L3C company, and anonymous LLC. LLC owners will also need to determine whether or not they’re member-managed or manager-managed. This is written into the company’s LLC operating agreement.
The best way to know which type of LLC will work best for you is by answering the question, “Who is the owner?” This should determine the chosen structure.
Here’s a quick reference on LLC ownership:
- One owner who is responsible for the company
- Most similar to a sole proprietorship
- The most common type of LLC
- Multiple owners who are jointly responsible for the business.
- Share profits
- Separately pay income tax on distributed monies
- Segregates the LLC into smaller units called series with its own members and managers
- Each series is its own entity that operates independently from the other series
- Most common to a corporation with multiple subsidiaries
Family Limited Partnership
- Designed for relatives doing business together
- Started by one family member who describes each member’s rights in the operating agreement
- Offers asset protection for family-owned businesses
- Only an option in Nevada
- Distributions to members require a 10-year waiting period
- Operates as a for-profit organization
- Supports a philanthropic cause
- Only available in New Mexico
- Members aren’t required to share their personal information, such as their name, with the public
2. Get an Articles of Organization Form
Once deciding upon the type of LLC you need, the next step is getting an articles of organization form. The articles of organization usually include these common elements:
- The company’s name
- Its location
- The purpose of the business
- Its management type (member- or manager-managed)
- The registered agent’s name and address
To get started filing, consider the state where the company will be registered. Typically, this is where the organization plans to facilitate the business. Some company owners establish an LLC out-of-state because of tax benefits their state does not offer. For example, Wyoming, South Dakota, and Nevada offer 0 percent corporate and individual income tax advantages. Nevertheless, it can cost extra to register as a foreign LLC. For this reason, most business owners select the state in which they’re doing business unless the startup is producing a significant amount of revenue.
Next, get an articles of organization form from your secretary of state’s office or website. The secretary of state is an elected or appointed official who keeps track of a state’s business records. Your state might have another department that specifically handles business filings, but the secretary of state’s office can direct you to the right place if they don’t handle LLC filings.
It’s important to note if you’re doing business in multiple states, you may be required to register the LLC in those states, too. Because each state has individual regulations for establishing an LLC, be sure to read through the requirements for the states you’re filing the paperwork in. There could be additional steps a state requires before you can move forward in the process. For instance, some states require a newspaper announcement.
3. Find an Available Name for the LLC
Before filing, the member registering the LLC must ensure the name they’ve selected for the company is in compliance with state regulations. This means the new business cannot have the same name as other LLCs doing business in the state. For this reason, conduct a quick trademark check first before settling upon a name.
Secure a name by:
- Visiting the U.S. Patent and Trademark website to search the database of registered business names.
- Legally protecting an available name by applying for a trademark.
- Securing the business’s domain names online, as well. This can be done using a service like GoDaddy.
- Reserving the name, even if you’re not ready to file the LLC’s paperwork yet. Each state has different fees, rules, and regulations for this. Check with the state you’re registering in for more information on their reservation policy.
In addition to this, the company must not pose itself as any legal business structure or entity it is not. For instance, an LLC’s name can’t have the word “corporation” in it, since it is not a corporation. In fact, most LLC owners include the word “LLC” or “Limited Liability Company” at the end of their company name. This makes it apparent what type of business structure the organization operates under.
4. Choose a Registered Agent, File, and Pay Fees
Your articles of organization cannot be filed without first obtaining a registered agent who is an entity or individual that receives legal documents on behalf of the LLC. Get started by using this list of some of the top registered agent services in the U.S. After acquiring an agent, the member organizing the LLC can begin the submission process.
- First, fill out all the information the articles of organization require. Submission for most states can be done online, in person, by mail, or through fax.
- Remember, every state has filing fees that must be paid during the submission process. The average cost to register an LLC is $132, though these prices range from state-to-state.
- Most states also require LLC members to pay an annual tax, and have accurate annual reporting. California is the most expensive ($800), while some states like Ohio, Texas, New Mexico, and Arizona do not charge annual tax. Learn more about each state’s LLC fees by checking out this list.
5. Create Your LLC’s Operating Agreement
An operating agreement is not a legal requirement of setting up an LLC, but it’s a great decision when starting a business. An operating agreement determines the legal, financial, and managerial aspects associated with individual members. Before opening, the organization should decide how the company will operate and what role each owner plays. When every member is clear about the responsibilities they’re accountable for, this measure prevents the potential for conflict or misunderstanding.
Here’s a few basics to cover with members:
- Voting policy and rights
- Ownership percentage
- Delegation of authority
- Transfers of power
- New member requirements
- Organizational management
- Capital contributions
- Profit and loss distributions
- Recordkeeping responsibilities
- Plans for remediation
An online search for operating agreement templates will result in a number of options for business owners. Yet, this isn’t a part of setting up an LLC to get wrong since it can have serious legal repercussions. Working with an attorney on this step might be in members’ best interests.
6. Receive the State’s Approval to Operate
A limited liability company cannot operate without first receiving approval from the state where the member filed it. The state will provide a certificate when the paperwork is approved by the office officiating the process. This is necessary before doing business, opening a business account, and any needed licenses or permits.
7. Use Your EIN to Start a Business Bank Account
After the state approves and certifies the LLC, apply for an employer identification number (EIN) for federal tax return purposes. This is a requirement LLC owners must comply with if they have employees. Additionally, banks do not let members open a business account without one. To apply for a free EIN with the IRS, visit this link. You’ll receive an instantly generated number after filling out and submitting the application.
Once you have an EIN number, open a business bank account to ensure all funds are appropriately managed. While every bank has different rules for opening an account, bring:
- The LLC’s articles of organization and operating agreement (if you have one)
- Your EIN confirmation or verification letter
- Two forms of ID
- And any other important LLC documents like the welcome letter from the state upon approval (step six).
Additionally, the bank provides those opening a business account with a Declaration of Beneficial Ownership form. For reference, this is a fraud prevention measure. The form identifies the owners of the company should any illegal activity happen involving the bank account.
8. Obtain All Local, State, and Federal Licenses or Permits
Finally, before opening an LLC the last step is securing any licenses or permits required for business operations. This includes at the federal, state, and local levels. For example, if you own a bar and restaurant, this type of business requires alcohol permits. Having an approved LLC isn’t enough to legally sell the company’s products.
Start by researching the requirements of doing business in your county and state. Companies regulated by federal agencies also have their own requirements. Make sure to take care of all needed licenses and permits before opening or you could end up with fines, closure, and other serious legal and financial penalties.
Consider Your Business Structure Options
While the limited liability company legal structure is friendly to entrepreneurs starting a business, it isn’t the only option. In total, there are three other choices business owners have: sole proprietorship, partnership, and corporations. It’s important to become familiar with all the various types of business structures so you can make an informed decision and wisely select the structure that will most benefit you and your new company. Your choice will have significant legal, financial, and operational implications.
Interested in more articles about starting a business?
Sole Proprietorship: Learn the Pros and Cons
Starting a Business: 10 Steps for New Entrepreneurs