Forming a limited liability company (LLC) may seem daunting and overwhelming, but it can be relatively straightforward once you have a clear understanding of how it works. In this comprehensive guide 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 most efficiently and effectively.
What is a limited liability company (LLC)?
Before diving into the details, we need to address the first question: What is an LLC?
A limited liability company (LLC) is a type of business structure in the United States, specific to each state, where the owners are not personally responsible for the company’s debt or liabilities. LLCs combine limited liability, like a corporation, and 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, as opposed to being taxed at both the business level and the personal level (known as “double taxation”).
Because of its liability protection, an LLC is an appealing idea for business owners who want to protect themselves from individual responsibility for any business debt or lawsuits that could occur, yet avoid the extra taxes and paperwork of a corporation. Once a business becomes an LLC, it becomes its own entity, and all legalities become separate from the owner(s).
Does an LLC make sense for me?
There are different types of business models to consider when starting your own company. How do you know if an LLC is the best choice for you? Let’s compare the various options.
S Corporation vs. LLC
Rather than a business entity itself, an S corporation is a federal tax election. A C corporation or an LLC can apply to be an S corporation. An S corporation is much like an LLC in that it protects its owners’ personal assets and avoids double taxation. The reason an LLC might opt for S corporation status is that it can save the owners money on self-employment taxes by splitting income into two groups, salary and distribution. The IRS requires you to only pay the 15.3% self-employment on your salary and take the remainder as a distribution not subject to self-employment tax.
However, there are some limitations on businesses with S corporation status:
- No more than 100 shareholders or owners are allowed.
- Owners must be U.S. citizens or permanent residents.
- Except for a few rare exceptions, another entity cannot own the S corporation.
- There are strict administration requirements, e.g., a board of directors and corporate officers are required, and there are regulations for holding formal annual meetings, reporting minutes, etc.
- There is only one level of taxation.
Sole Proprietorship vs. LLC
Operating a business as a sole proprietor is relatively low-cost and straightforward, but there is no liability protection like an LLC offers. There is no need to file any paperwork because the business is not separate from the individual owner. The owner reports profits and losses from the business on their personal tax return. However, this could be a risky choice because it means that the business owner is personally responsible for all debt and liabilities that have to do with the company.
The major difference between operating as a sole proprietorship versus an LLC is the separation between personal and business. Personal assets are kept separate in an LLC, whereas a sole proprietor’s personal and business expenses are the same. If someone sues the business, they can go after your personal savings and property.
General Partnership vs. LLC
Here, you are dealing with formalities. Forming an LLC requires several specifics, including paperwork that is drafted and filed with the Secretary of State and paying the filing fee. When forming a partnership with someone, it requires a much less formal agreement between the two parties. General partnerships can be put into motion through an oral agreement — although this is not always recommended — a written agreement, or an implied agreement, which is based on the partners’ actions and is determined by the court.
Two primary things you should consider when deciding between a general partnership and an LLC:
- Liability: General partnerships do not provide either partner with limited liability as an LLC does. This means that partners are liable for company debt. If something happened where only one partner had the available funds to cover the debt, they would be responsible for the entire amount, even if the other partner was at fault.
- Flexibility: An LLC gives members the freedom to choose their own percentage of ownership in the business, whereas a general partnership requires both parties to share equal ownership.
Limited Liability Partnership (LLP) vs. LLC
An LLP operates as an LLC in that it provides limited liability, but an LLP provides it to a different extent. With an LLC, all members are protected from being personally responsible for any business debts or lawsuits. In contrast, an LLP only provides liability protection to each partner for their direct investment. This means that the business partners are not responsible for each others’ actions and are protected if one partner commits wrongdoing. However, the laws defining and governing LLPs vary from state to state, so the liability parameters can also differ. You’ll need to check the applicable laws in your state.
Unlike an LLC, an LLP, by definition, must have more than one owner. An LLC can be one or any number of owners.
The IRS recognizes neither of these business structures for tax purposes. They are both considered pass-through entities, which avoids double taxation for the business owners.
C Corporation vs. LLC
If international business is part of your plan, a C corporation might make more sense for you. One of the big differences between a C corporation and an LLC is taking your business affairs overseas. C corporations can also secure company growth with funds from outside investors. Like an LLC, a C corporation has liability protection, but it does not protect its owners from double taxation. C corporation owners pay corporate and personal income tax.
Additional differences include:
- The ease of buying and selling shares makes it easier to attract investors in a corporation than an LLC.
- As with an S corporation, there are strict administration requirements, including holding formal annual meetings, reporting minutes, and having a board of directors and corporate officers.
- There is only one level of taxation for a C corporation.
Still not sure if an LLC makes the most sense for your budding business? Sign up with ZenBusiness today and get access to the information and guidance needed to help you make that decision.
How do you start a limited liability company (LLC)?
LLC requirements vary state by state, and it’s important that you are well-versed in your specific state laws before proceeding. Generally, it comes down to these five basic steps:
- Name Your LLC
- Choose a Registered Agent
- File the Certificate of Formation/Articles of Organization
- Get an Operating Agreement
- Apply for an EIN and Review Tax Requirements
1. Name Your LLC
Now that you’ve decided you want to form an LLC, it’s time to bring your dream to life with its own name — and yes, it must be unique. When naming your LLC, you must choose something completely different from any other LLC in your state. The rules as to how different your LLC’s name must be from others vary state by state. Although sometimes all it takes is switching up the punctuation or changing a word from singular to plural to qualify, it’s usually a smoother process when the names are more distinct. However, one component that is always required is the inclusion of “limited liability company” or an abbreviation of it at the end of the business name. The acceptable abbreviations also vary by state.
It’s important to do your research to check if your desired name is available. Google is helpful, as is checking around on social media, but you will also want to complete a business database search on your Secretary of State website.
Your LLC name needs to be different from other LLCs, and it also cannot be previously trademarked. There are two kinds of trademarks to be aware of: federal and state. Visit the U.S. Patent and Trademark Office (USPTO) and search your business name or logo to make sure it hasn’t been federally trademarked.
Determining whether your desired name already has a state trademark is trickier because many states don’t have a search engine for checking existing trademarks. Fortunately, the USPTO has a page linking to the office overseeing trademarks in each state. You can start by contacting the appropriate office in your state.
Once you’ve determined that it’s available to use, you have the option of registering your own trademark. A state trademark is less expensive and much less complicated to get; however, it does restrict your trademark benefits to the state it’s recognized in.
On the other hand, federal trademarks are more costly and can take longer to get, but you can use your trademark nationwide, and there is much more protection provided for your company. Federal trademarks also allow for the ® symbol, whereas state trademarks only allow TM (trademark) or SM (service mark). Trademarking your LLC can keep other businesses from using the same name or anything too similar.
There is also an option to add a DBA (“doing business as”) name to your LLC. A DBA is just another name to call your business and can be very useful if your LLC offers multiple products or services. It can help differentiate between their specific business concerns.
Each state has different regulations when it comes to naming an LLC. You will often find that certain words are prohibited, including those that are considered profane or obscene or that may mislead people about the nature of the business. Some words are restricted in most states, such as “bank” and other forms of the word (“banking” and “banker”), “engineering,” “insurance,” and “savings.” In some states, business owners who wish to use words such as these must have a certain license and/or fill out additional paperwork.
You’ve spent time coming up with a name and researching its availability — now you can think about securing it. Most states will allow you to reserve your desired name for a fee so that you don’t have to worry about someone else nabbing it before you can officially launch your business. Check with your state on the requirements to reserve your business name. Then, go one step further and reserve a domain name for your company website, so you have that set up and ready to go as soon as your business can launch.
2. Choose a Registered Agent
A registered agent essentially acts as the liaison between an LLC and the state it’s registered in. This third-party individual or business entity acts as a point of contact on behalf of the business and receive things like tax forms and legal documents, government correspondences, and notices of a lawsuit.
You can be your own registered agent so long as you have a physical street address in the state in which your LLC is filed (P.O. boxes aren’t allowed); however, hiring an outside registered agent service has its benefits.
It allows you to have more privacy and flexibility and can decrease the added stress that can come with being your own agent. Using a third-party registered agent service, such as the one offered at ZenBusiness, ensures that you are compliant with the law, always protected, and strategically organized.
3. File the Certificate of Formation/Articles of Organization
The official name for the paperwork filed to register your business depends on which state you are filing it in. Generally, the document is referred to as the Articles of Organization, but some states refer to it as a Certificate of Formation or Certificate of Organization. Regardless of what it’s called, the concept is the same: It is used to establish state recognition of the LLC and outline the details of its members.
Check your Secretary of State’s website to see the filing requirements, as these also vary state by state. You’ll always need basic information about the LLC and its members, including the LLC name and mailing address and the registered agent’s name and address. You might also be asked to state the purpose of the LLC and list any current LLC members and/or managers.
A few parts of the form might be unfamiliar to someone who is just entering the business world. You may be asked whether your LLC is member-managed or manager-managed. In a member-managed LLC, the members take it upon themselves to handle day-to-day operations and decide who’s responsible for what. In a manager-managed LLC, one or more supervisors are chosen by the members to be in charge.
You will also need to list the location of operations, which should be the place in which members work together. If the business is operated from a private home, list your home address. If mail is not deliverable to the place of work, make sure to include a USPS-verified mailing address.
The final, and most important, step is having an organizer of the LLC sign the form. Then, you are all set to submit it. In most states, this can be done online or by mail. Any instructions for submitting the signed form and payment can be found on your Secretary of State’s website.
4. Get an Operating Agreement
Although LLC Operating Agreements are not required in every state, it’s a smart business move to have one. This legally binding document provides clear and concise definitions of all ownership terms and rules or management decisions. It protects owners’ personal assets and outlines ownership percentages, responsibilities, voting power, and a succession plan if an owner decides to leave the business.
Having an Operating Agreement can prevent any miscommunication and resolve any conflicts between members. It is not required by law to file an LLC Operating Agreement with the Secretary of State, so once all parties have agreed upon the terms and signed it, it’s advisable to keep the document safe and secure with other important paperwork.
Utilizing an Operating Agreement template can set you up for success regarding having the right structure and format for this important document. ZenBusiness offers various plan options that include a customizable Operating Agreement template at a very reasonable price.
5. Apply for an EIN and Review Tax Requirements
After officially forming your LLC, you should consider registering it with the federal government by applying for an Employer Identification Number (EIN) from the IRS.
An EIN is the business equivalent of a personal Social Security number and is required if your LLC has multiple partners or employees. It’s free to apply for an EIN and can conveniently be done on the IRS website. When done online, the EIN is issued immediately.
What are the costs of forming a limited liability company (LLC)?
The costs to file an LLC vary state by state. Generally speaking, the fees can range anywhere from $40 to $500. In most states you can file an LLC online using a credit or debit card or by mail with a check or money order. Visit your Secretary of State’s website to find all of the LLC filing fees associated with your particular state.
In addition to the filing fee, some states also require business license fees, publication fees, name reservation fees, and other filing fees. There are also recurring costs that are required to maintain your LLC. These can include filing annual or biennial reports, license and permit renewals, and franchise taxes.
But the biggest cost in launching your LLC may be in time and energy. Having a service that already knows the ins and outs of forming and running a business not only saves you time, but also eliminates the stress and frustration of wrestling red tape and government bureaucracy. ZenBusiness can file your paperwork for you, provide a registered agent service, and supply an Operating Agreement template for one low price.
What are the benefits of a limited liability company (LLC)?
There is a lot at stake when you start your own business. An LLC is a crucial component to the safety and security of your personal assets. It helps to keep business and personal separate, so you are protected from any business debts, claims, lawsuits, etc., anywhere down the road. It’s this reason, among others, that so many business owners decide to form an LLC.
In addition, here are some other benefits of an LLC:
- Flexible management structure
- Avoid double taxation
- Customizable ownership options
- Less-complicated procedures
- Establishes your business as official
Flexible Management Structure
As opposed to a corporation, there is no board of directors required for an LLC, which means there is no requirement to have annual meetings to choose those board members. LLC owners have a lot more freedom and flexibility in the way they choose to run the business.
Avoid Double Taxation
LLC owners benefit in that they don’t have to submit two separate tax payments to the government. They pay their business taxes through their individual tax returns, rather than paying corporate taxes and personal taxes on their income as corporate shareholders do.
Customizable Ownership Options
LLCs can be made up of multiple members, and those members have the freedom to determine their ownership percentages. They can be based on each member’s monetary contributions to the business or some other criteria that they set forth in the Operating Agreement.
The requirements for meetings, minutes, bookkeeping, reporting, etc., are much less complicated for an LLC than for a corporation. Even though these rules vary somewhat state by state, LLCs still require less formality and paperwork.
Establishes Your Business as Official
Once your filing is approved, the state recognizes your business as an official limited liability company. This is ideal when dealing with new members, customers, or clients, as people may be more willing to work with and trust your company when they see “LLC” in its title.
What are the disadvantages of a limited liability company (LLC)?
As with all business ventures, there are pros and cons to consider. Forming an LLC might not always be in your business’s best interest due to various restrictions, some of which vary depending on your specific state’s LLC laws.
Some disadvantages of forming an LLC include:
- Only recognized in the United States
- Stock is not available
- Fees required
Only Recognized in the United States
LLCs are only recognized in the United States. If you plan to do business in other countries, an LLC might not be the best decision, as out-of-country business would be difficult.
Stock Is Not Available
Many times, businesses grow because of the capital gained from outside investors. LLC owners cannot issue shares of stock in their company, so this avenue of increasing revenue to grow the business is not an option.
Every state is different concerning the formation costs of filing an LLC — and there is a pretty large range. Some are $50, and some are as much as $500. Some states also charge an annual franchise tax.
How is a limited liability company (LLC) taxed?
As mentioned, avoiding double taxation is one of the main benefits of starting an LLC; however, it’s important that LLC owners understand the individual taxes they are responsible for.
By default, an LLC with one member is taxed as a sole proprietorship, and an LLC with multiple members is taxed as a partnership. These members are considered self-employed and are responsible for paying self-employment taxes. LLC owners also have the option of being taxed as a C corporation or S corporation, which may be advantageous to some LLCs.
LLC business taxes may also include:
- Employment taxes, including taxes on Social Security, Medicare, workers’ compensation, and unemployment (if you have employees)
- Property taxes (if you own property)
- State sales and excise taxes
- Franchise taxes
Each state has its own set of tax regulations. Check with your state’s Department of Revenue and the IRS to familiarize yourself with these rules. It’s always wise to consult a qualified accountant when navigating tax laws.
More Limited Liability Company (LLC) FAQs
What is the processing time to form my LLC?
It varies by state, but the standard time frame is two to three weeks from when the state receives your documents, whether online or by mail, but can be expedited for an additional fee.
Where should I form an LLC?
It is usually best to form an LLC in the state where your business is located.
Do I need a lawyer to form an LLC?
No. You can form an LLC by yourself. There is no requirement to use a lawyer. Sign up with ZenBusiness today for expert help navigating the process.
Do LLCs get a 1099?
If your LLC is filed as a corporation, you won’t need a 1099 for the business. However, if your LLC employs independent contractors, you will need to file 1099 forms for these individuals.
How do I dissolve my LLC?
The steps may vary state to state, so check your state’s LLC dissolution procedures. Generally, the timeline is the same. You must file the Articles of Dissolution with your Secretary of State, and then file cancellations in any other states that your LLC does business in.
Next, you must file your final tax return, pay any final payroll taxes, and close your EIN. There is a lot of paperwork and steps involved in the process. ZenBusiness can help ensure that you successfully dissolve your LLC without any hiccups along the way.
Can an S corporation own an LLC?
Yes. Since an S corporation is a business entity, it can be the owner (or a member of) an LLC, but an LLC cannot own an S corporation — individuals can only own them.
However, an LLC can be taxed as an S corporation if it meets an S corporation’s eligibility requirements, which include having a limited number of shareholders who are U.S. citizens. To find out if your LLC is eligible, sign up with ZenBusiness today.
Can an LLC be a nonprofit?
Yes, but it’s not all that common. Certain requirements must be met, and it can be a little confusing to understand all of the legalities. It’s always wise to seek a legal and/or financial professional when considering these questions.
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