Planning to start your business in Hawaii? Great idea! An LLC opens the door to great tax savings and protection of your personal assets from legal liability. Hawaii offers excellent tax benefits to startups and LLCs through various schemes, such as its Enterprise Zones program. It’s a great destination to incorporate your LLC, and given the tourist inflow into the State each year, you have a lot of business opportunities to explore.
The procedure of incorporating an LLC may seem daunting and filled with jargon, we’re here to break it down for you and walk you through the process step by step.
Name your Hawaii LLC
A business is known by its name and its products. Therefore, names should not only be indicative of what your business is but also catchy so as to attract attention. The State of Hawaii has detailed guidelines for naming an LLC.
§16-36-15 of Hawaii Administrative Rules lay down the law for naming trademarks, corporations, LLCs, etc. The very basic requirement is that the name should not be ‘substantially identical’ to a registered name or mark.
For instance, two entities cannot have names in which one has numbers spelled out and the other has numbers written in numerical format. Thus, you cannot register 36-China Town LLC while Thirty Six-China Town LLC exists.
Similarly, the use of homophones is not allowed. This means that your company cannot have a name that sounds like the name of another. E.g. Right Properties LLC and Wright Properties LLC.
Merely using words like “an”, “on”, “at” etc. is not enough to distinguish a name from a preexisting one. You also cannot add the terms Hawaii or Hawaiian to distinguish your company’s name. For e.g. Swift LLC and Hawaiian Swift LLC.
You can use names already in existence if substantial distinguishing additions are made to convey a different meaning. For e.g. Stephen’s Shop LLC and Stephen’s Sweet Shop LLC. Changing the sequence of words would also work in differentiating the names, for e.g. System Research and Analysis Consultants LLC and System Analysis and Research Consultants LLC.
It is mandatory for the nature of the entity to be indicated in the name. So the name of your company must include phrases like Limited Liability Company or a form of its abbreviation.
Terms like “bank”, “savings and loan”, “trust company” etc. which give the impression of a financial institution cannot be used unless the entity has been authorized to operate as a financial institution in the state. Alternatively, the entity should have been approved by the commissioner of financial institutions.
Terms that can cause your company to be confused with state agencies like treasury, post office, FBI, etc. cannot be used. Thus you cannot name your company Ferrero Bridal Institute and abbreviate it as FBI.
Terms related to professional services like attorney, university, etc. require additional paperwork and a licensed practitioner of the area to be a member of the LLC.
Does Your Business Require a DBA?
DBA or “Doing Business As” is a trading name that your company can use as an alias. It is not mandatory to have a DBA. An LLC can conduct business with its original name as well. It is mostly registered for introducing a branding strategy or to diversify into a different sector.
For example, two Entrepreneurs, Mr. Phil Knight and Mr. Bill Bowerman started a company named Blue Ribbon Sports. However, they decided to conduct business with another brand name. This name is known worldwide as Nike. Nike is the DBA they chose to make their business world famous. So, if you want to create a brand name, that is different from the name of your LLC, you should file a DBA.
Doing a Name Search
The laws of Hawaii require that the name of your LLC must be different from that of any other company in existence. Before picking a name for your LLC, you should perform a name search for your business. If no other substantively similar names have already been picked, you’re good to go!
Reserving your LLC’s name
If you have decided on a name, you can reserve it for a period of 120 days by filling out the application online or by mailing the form.
Registering your business domain
Are you planning to conduct business the traditional way i.e., with physical stores, etc., or are you planning to expand your business across the country or the world through the web? You may not be thinking of launching your website right now but you might want that later. You can check if your business name is available as a domain and can register it to reserve it so the option is always available to you.
Choose a Registered Agent
A registered agent will be the point of contact between your business and the state, ensuring you receive all legal correspondence, and communicating on behalf of your LLC.
The State of Hawaii requires that all LLCs have a registered agent. You can appoint a registered agent by nominating their name in the Articles of Organization of your LLC.
Who Can Be a Registered Agent?
You can appoint any of the following persons as the registered agent for your business as long as they are available during ordinary business hours:
- An individual aged above 18 years, residing in Hawaii,
- A domestic entity authorized to conduct business in Hawaii.
- A foreign entity authorized to conduct business in Hawaii.
- Owner/member/employee of the LLC.
- Registered Agent Service.
Individual v. Registered Agent Service?
There is no restriction against appointing your friends or family as your registered agent. However, the registered agent must be available during ordinary business hours to receive correspondence. Further, appointing a commercial registered agent has some significant advantages.
The registered agent service will use their address and your personal address will not be publicized in any of the public legal documents. In case you plan to expand your business to other states, you can extend the services of the registered agent to other states as well as they have a presence across the country.
File the Articles of Organization
The Articles of Organization are the documents that formally establish your LLC and provide it with the status of a separate legal entity. The Articles of Organization registers your organization with the State of Hawaii. You can file the Articles of Organization online or mail it to the Department of Commerce and Consumer Affairs.
Create Operating Agreement
The operating agreement is the document that governs the operations of your company. It establishes efficient and customized procedures, safeguards your legal assets, and establishes your LLC’s legitimacy in the eyes of banks, courts, government agencies, and other stakeholders.
Any disagreements as to the working of the LLC, for instance, on profit distribution often leads to legal disputes. Therefore, it is very important that you have an Operating Agreement that clearly spells out the various aspects of the day-to-day functioning of the company.
Writing The Operating Agreement Yourself vs. Hiring a Service
You can either write your operating agreement yourself or hire a professional for the same. In order to avoid the complexities of writing it on their own, people hire professionals for the same. Generally, an operating agreement should contain the following details.
- Time, Location, Owners, and Organisation
- Capital Contributions
- Management and Voting
- Distribution of profits and losses
- Membership changes
It is better to hire a professional service to write the agreement for you so that you do not miss out on any of the important aspects.
Limits of Operating Agreement
You cannot include anything prohibited by State or Federal laws in your operating Agreement. In addition, Section 428-103 of the 2010 Hawaii Code prescribes certain other restrictions of what cannot be included in your operating agreement such as varying the rights of third parties, or unreasonably restricting access to information or reducing the duty of care owed towards members of the LLC, etc.
Obtain an EIN
Employer Identification Number (EIN) is a 9-digit number that has multiple functions. This number is allotted by the Internal Revenue Service mainly for tax purposes. But you can also use this number to hire employees. It is also necessary for getting a bank account, credit card, business permits, and loans.
File Annual Reports
Hawaiian law requires businesses to file an annual report. It has to be filed with the Department of Commerce and Consumer Affairs Business Registration Division. The report provides the public with information regarding your business entity and does not contain any financial information. The filing of an annual report is mandated by statute. This also makes you eligible for state contracts. It also places your business in good standing and timely filing of reports keeps it in good standing.
§428-210 of Uniform Limited Liability Company Act provides for certain details that go into an annual report. You are required to provide the name of the LLC, principal address, name and address of registered agent, nature of management and names and addresses of all the members.
You need to file the annual report depending on when your LLC is formed. The cycle for filing the Annual report depends on the quarter in which your LLC is formed. For example, if the LLC was formed in the first quarter, the annual report is due at the end of the first quarter on 31st March.
If you don’t file your annual report, you will be in violation of Hawaiian law, and be liable for penalties, and risk losing good standing with the State of Hawaii.
Tax Liability For Your LLC
Federal Tax Liability
An LLC can be taxed under three classifications: Partnership, Corporation, or an Individual. If an LLC is a single-member LLC, the IRS considers it as a disregarded entity and ignores your tax structure. The LLC will be taxed like an individual. The LLC’s income will be reported to the owner’s personal income at the end of the year. You will have to fill certain forms for this purpose. You will have to fill this form specifically for reporting the income from your business. In case you pay yourself a salary, you will have to fill this form for self-employment tax. In case of supplemental income like from rentals and other investments, you will fill this form.
If it is a multi-member LLC, it is taxed as a partnership by default unless the LLC specifically elects to be treated as a Corporation through Form 8832.
If the LLC files as a partnership, you will have to fill out Form 1065.
If the LLC files as a corporation, it will have to fill Form 1120. Those LLCs that opt for S-Corporation have to fill out Form 1120S. Each owner or member of the LLC will have to show their pro-rata share of LLC’s income, credits, and deductions on Schedule K-1 in the same form.
State Tax Liability
The State of Hawaii does not levy a sales tax on the sale of goods. Instead, there is a General Excise Tax levied on the businesses. Businesses can pass on this tax to their customers. Irrespective of this, they have to pay the tax. Physical property is subject to excise tax. Digital goods and services are also taxed.
For charging excise tax on behalf of the government, you will need a seller’s permit. You can register for the seller’s permit Online. A fee of $20 will be charged. However, if your business is a resale business, then you do not need to pay excise tax and can exempt yourself by a resale certificate. You can download it from the Hawaiian Department of Revenue.
In order to avoid penalty, the business must collect the correct amount of tax from the consumers. Tax can be collected on sales which can be broadly divided into 4 categories:
- Store Sales – When the business is selling in the same place it is located, you will charge the state tax of 4%, county and respective city tax.
- In-county sales – When the business is selling to some other city but in the same county, you will only collect the state tax of 4% and the respective county tax.
- In-state sales – When the business is selling to some other county, you will only collect the state tax of 4%.
- Outside sales – When the business is shipping its goods outside the state, you need to pay the tax if you have a physical business location, an employee, drop-shipping facility, marketing affiliate, etc. in that state.
You can file your General Excise Tax return online.
If you’re an employer, you will need to register for Unemployment Insurance Tax with the Department of Labor and Industrial Relations. You will also need to register for Employee Withholding Tax on behalf of your employees.
Permits and Licenses
Before your LLC can finally start its operations, there is another important step to be taken. Depending on the nature of your business, you would require certain Federal and State licenses and permits for e.g., the General Excise Tax permit. For a list of federal agencies which might govern your business, click here. For finding out the state licenses, click here. You can apply for these permits at the very same sites.
Business Bank Account & Phone Number
When starting a business, separating your personal and professional finances is crucial. This helps in keeping records and in tax assessment. Further, If your personal and company assets are mixed, the protection of your personal assets in lawsuits against your LLC could be in jeopardy.
Having a separate phone number for your business is a good practice since it protects your privacy. For this, you can simply register for another phone number on the company’s name or any member’s name. Alternatively, you can have a virtual phone number that records voicemails for you and forwards the call to your number.
Hawaii offers great benefits, especially to small businesses and startups. For instance, under the Hawaii Enterprise Zone program, you are eligible for general excise and other tax exemptions if you locate your business in one of the designated enterprise zones. Do ensure you check your eligibility for these programs and apply accordingly. With the last step, you will complete all the procedures required to form an LLC in Hawaii. However, if you are hesitant about any procedure, you can always use a professional service that suits your needs. Enjoy your new LLC!