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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).
An S corporation is much like an LLC in that it protects its owners’ personal assets and avoids double taxation, but it does not offer the same flexibility of an LLC. Generally speaking, if you prefer a more flexible management style for your business, an LLC makes more sense. An S corporation is more suited for your business if it is more complex and will need a more structured framework. These are some of the limitations a business faces when formed as an S corporation:
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.
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:
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.
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:
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.
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:
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.
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.
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.
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.
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
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.
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