What is an LLC?

Step 1 – Name Your LLC

Great! Now that you have established you want to set up an LLC, choosing the name for your business is the first step. You want to name of your LLC to be unique and something completely different from any other limited liability company in your state.

States vary with their rules and requirements on entity names. One requirement that is set by every state is the LLC must end with some variation of “Limited Liability Company”, “LLC”, or “L.L.C.”. Once you have viewed the requirements, it is time to create your business name.

STEP 2 – Choose a Registered Agent

A registered agent (RA) is an individual or company that accepts documents and notices on behalf of your business. When registering your LLC, you will need to appoint a registered agent who has a physical address within the state. All fifty U.S. states require a registered agent for your business entity.

You can act as your own Registered Agent for your LLC. The requirement is that you have a physical address in the state you file. A P.O. Box address will not be accepted. To learn more about those benefits and Registered Agents, check out our “Does My Business Need a Registered Agent?” guide.

STEP 3 – Decided on Member-Managed or Manager-Managed

Your LLC can be structured as manager-managed or member-managed. Most small businesses choose for their LLCs to be managed by members. This is where the business decisions and operations are done by the members equally. Members can also appoint a manager or managers to operate the business as well.

This could be a preferred structure that will allow some members to be passive investors in the business. The members could delegate management responsibilities and duties to one or more members or even nonmembers of the business.

Some states require you to specify this when completing your filing and is something to take into consideration when beginning to establish your business.

STEP 4 – File Articles of Organization or Certificate of Formation

Different states refer to the state filing as either Articles of Organization, Certificate of Formation, or Certificate of Organization. The most common term used is Articles of Organization, however, the concept is the same no matter what it is referred to as.

They are used to establish:

1. Members – also referred to as Owners of the LLC
2. Managers – Individual(s) chosen by LLC members to manage the business and run day-to-day operations
3. Principal Address – the official address of your business
4. Registered Agent – Personal or business to accept mail on your behalf and located in the state of your filing

One item to consider is the management structure of your LLC. Some states require you to specify this when completing your filing. This may be an unfamiliar question for someone who is just starting out. Your LLC can be structured as manager-managed or member-managed. The former will allow members to choose certain individuals to run the business and be in charge. The latter is where all the members operate the business themselves, equally.

STEP 5 – Apply for your EIN

Although you are not always required to obtain an EIN, you should consider applying for one. This helps you separate your business finances from personal life finances. If your business has multiple partners or employees, it is required to have an EIN.

An EIN is like having a Social Security Number for your business. It is free to apply for an EIN and offers benefits to have one. You can apply for your EIN on the IRS website and if you choose to view it online, is issued immediately.

A few benefits to an EIN include:

1. Preventing Identity Theft
2. Speeding up Business Loan Applications
3. Opening a Business Bank Account
4. Hiring Employees

STEP 6 – Get an Operating Agreement

Operating agreements are contracts between LLC members. They provide information on how the company will operate and function. Unlike Articles of Organizations, operating agreements do not need to be filed with the state. Although they are not filed, they are still legally enforceable documents.

Operating agreement provisions can show ownership percentages, protect members, discuss the voting system, prevent miscommunication or disputes, etc. There are standard provisions that should be included in all operating agreements.

A more in-depth explanation for operating agreements can be found by contacting us. It is important to consider the benefits of an operating agreement for your LLC. It provides a great deal of protection for the business and its members.

How is an LLC taxed?

As mentioned before, an LLC can be taxed such as a sole proprietorship, an S corporation, or a partnership. By default, a single-member LLC is taxed as a sole proprietorship, while a multi-member is taxed as a partnership. LLC owners also have the option of being taxed as a C corporation or S corporation.

Taxes for an LLC may 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

States will vary with tax requirements and it is always best to check with your state’s Department of Revenue and IRS to determine these regulations. You may also look into consulting with a CPA or Tax Professional for assistance and more information.

Pros of Choosing an LLC

• Membership Flexibility: Individuals, partnerships, corporations, trusts, and other LLCs can be members or owners of an LLC. Also, there are no limits on how many members you can have in an LLC, unlike S-Corporations.
• Pass-Through Taxation: LLCs typically do not pay taxes. The business income and profits “pass-through” to the business owner’s personal tax return. This process bypasses the corporate income tax and avoids the potential of double taxation.
• Easy Cash Distributions: Owners or Members can make “draws” on the company profit account rather than taking salaries.
• Heightened Credibility: Starting an LLC may help a new business establish credibility. Including “LLC” in your business name lets customers and other professionals know your business is credible.
• Management Structure: An LLC can be either manager-managed or member-managed. This gives LLC members the ability to make the decision of what structure would be best for their business.
• Limited Personal Liability: An LLC can offer limited protection to members. This means that creditors cannot come after personal assets to pay business debt. “Limited liability” does not mean “no liability”. An LLC does have to show that the business exists separately from the owners and avoid piercing the corporate veil.

Cons of an LLC

• Cost: LLCs have ongoing costs associated with maintaining the status of the business. These are annual reports and/or franchise tax fees. The states vary in the amount of these fees so it is important to check with your Secretary of State.
• Transfer of Ownership: LLCs have more paperwork required to transfer membership. They tend to be more difficult than with a corporation. Unlock corporations where shares of stock can be sold to increase ownership, LLCs typically require members to agree and alter ownership percentages to add new members.

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