Creating an LLC
8/11/2023
Building a strong brand may be top of mind when choosing a name for your new business, but there are certain legal requirements to bear in mind as well. Most states will not let you choose a name that is already in use, for example. In fact, if your proposed business name could be confused with an existing business, your filing could be rejected. States generally offer a business name lookup tool that will list active and previously active businesses, registered agents, and assumed business names.
Once you have settled on a list of potential names, and run those names past family and friends (or focus groups), do your due diligence and perform a thorough business name search. It may even be worth doing a news search, as well as a domain lookup at Archive.org to determine if the name you have chosen has any past associations or reputation issues you wish to avoid in your new business.
Designate a Registered Agent
All US businesses require a registered agent. It can be you, a company employee, or a third party acting on the company’s behalf. The registered agent is the person officially designated by your LLC to receive official and/or legal documents for the company.
The registered agent must be at least 18 years of age, and be available at an address within the state where your business is registered.
If you are registering in your home state, you can name yourself as the designated registered agent for your company, and if you are confident in your ability to handle the legal paperwork you may receive, it can be a money saving option. There are also registered agent service companies that can act on your behalf, regardless of your state of filing. Several are linked in the side bar.
Articles of Organization
Establishing your LLC as a legal entity requires filing what are generally called “articles of organization.” Your state can provide a copy of the document. An LLC formation service will also be able to provide this for you. Each state has specific requirements, but generally your articles of organization will include the following:
- Business Name – see above
- Address of principal place of business – refers to the main location at which your LLC will conduct the bulk of its business
- Statement of purpose – defines the goals and intentions of your LLC, as well as describes the services offered to your customers
- The management structure of your LLC – will the company be member-managed or manager-managed
- Contact information for your registered agent – name and address of your LLC’s registered agent
- The duration of the LLC – the date your LLC will dissolve (some states allow perpetual LLCs)
Operating Agreement
While not required in all states, writing an operating agreement can still be a good idea, particularly if your LLC will have multiple members, because the operating agreement spells out all of the legal, financial, and management rights of all members of the LLC.
Importantly, the operating agreement can also spell out profit distribution, capital contributions, leaving the LLC, and dissolution. Essentially, your LLC’s operating agreement will be the rules of the road your LLC operates under going forward.
Single-member LLCs and those with only a few members can easily draft an agreement with a little research and a boilerplate template, but new businesses with many members and different levels of investment may wish to seek the help of an attorney.
Annual Filings
To keep your LLC active you will need to file with its state of registration annually. This involves paying an annual fee for your LLC and any DBAs associated with it, and can be handled through your state’s filing website or through the mail.
Licenses & Permits
Along with filing your LLC, your state, county, and municipal governments may require certain licenses and/or permits depending on the type of business you will be operating. It is a good idea to do your research and get your ducks in a row by securing these licenses and permits in advance. There will likely be fees and application processing time associated.
Apply for an EIN
An EIN or employer identification number is an important step in setting up your LLC. An EIN is your means of separating business and personal assets in the eyes of the IRS. Some banks will require an EIN for setting up an operating account.
Compartmentalize Your Assets
It is good practice in any business to keep business and personal assets separate. Starting up an LLC and registering an EIN are good first steps, but it is also recommended to maintain separate bank accounts and lines of credit. This line is especially important with regards to how members get paid, as W2 employees, as 1099 consultants, through owner draws, or not at all (perhaps the purpose of the LLC is future acquisition).
Types of LLCs, Which is Right for You?
The two most common forms of LLC are single-member and multi-member. The question here is, will the LLC have one owner or more.
Other forms of LLC include L3C, Series LLC, PLLC, Restricted LLC, and Anonymous LLC.
L3Cs are mission or cause driven. Also known as "low-profit liability companies," and "hybrid entities,"L3Cs combine characteristics of both non-profit and for-profit entities.
Series LLCs are structured such that one LLC (parent or umbrella company) sits atop a series of stand-alone LLCs. Each child LLC in the series has separate assets, and operates largely independent of each other. An example of a Series LLC might be a real estate investment company that operates a series of apartment complexes, each as a stand-alone entity. Not all states allow Series LLCs.
The PLLC is an entity available to certain licensed professionals. Common in medicine and law, the PLLC offers liability protection of personal assets for business owners in those professions. PLLCs are similar to regular LLCs, but must be reviewed by the licensing board. PLLCs are not recognized in all states.
Restricted LLCs are an entity that does not pay taxes or make distributions for its first 10 years of operation. At the time of writing, Restricted LLCs can only be formed in Nevada.
Anonymous LLC is an entity formed in a state that does not disclose ownership, currently Delaware, Nevada, New Mexico and Wyoming.
Benefits of an LLC Over Other Entity Types
LLCs are a popular choice for startups. Simply put, starting up an LLC is relatively simple, inexpensive, and doesn't necessitate a second filing come tax time. Separating LLC assets from personal assets also provides members with a level of liability protection in case the business takes on more debt than it can sustain, or is sued, for example.
What Does it Cost?
LLC startup costs will depend to a large extent on your state, if you choose to use a startup formation service provider, and if so, which services you choose to utilize. Remember, generally speaking, each service will incurr its own fee. At the time of writing combined state fees for name registration and filing articles of organization range from $40 to $500 depending on the state of registration. Filing for an EIN with the IRS is free.
LLCs and Taxes
LLCs are treated like general partnerships with regard to tax status. They can elect to file Form 2553 to be treated as an S Corp or Form 8832 for C Corp, but general partnership is their default federal tax classification. General partnerships are pass-through entities. What that means is that each member's share of the businesses profit is passed through to that member's personal taxes, regardless of whether they received the profit as pay or other compensation. $100,000 in profit in the corporate account is taxed the same as $100,000 in the members' collective pockets. The same is true for business losses.
The articles of organization discussed previously will dictate what percentage of the profit belongs to each member. For single member LLCs the math is pretty simple, but multi-member LLCs can have much more complex ownership structures.
When filing their taxes, the business is required to file a Form 1065: U.S. Return of Partnership Income. This form reports annual profit and loss to the IRS. Members individually file Schedule K-1s to report their share on their personal income taxes.
LLC members will also be responsible for state taxes, which vary by state (refer to your Secretary of State's website for your state of filing). Members are also required to pay self-employment tax at a rate of 15.3%. This is akin to Social Security and Medicare in the private sector, and may qualify for a deduction (check with your tax preparer).
