Are you a budding entrepreneur on the lookout for introducing your novel business idea into the market? The first step would be to select a structure for the business you have in mind. A Limited Liability Company (LLC) can be your ideal choice.
You may access our free State-specific guides on how to form an LLC. All you need to do is select the State where you wish to incorporate your LLC and follow the detailed step-by-step instructions provided therein.
This article will look into each step of the LLC formation process and leave you in the best possible position to start your LLC.
What is an LLC?
An LLC stands for “Limited Liability Company.” It is a type of business structure in the US that combines the features of a corporation and a partnership. An LLC protects your personal assets from business debts. This feature is called limited-liability protection.
An LLC is, by default, treated as a ‘pass-through’ entity for tax purposes. It means the LLC does not have to file separate tax returns. Instead, the members pay taxes on the income they earn from the business. As a result, you can avoid double taxation.
Following are some of the advantages of an LLC as compared to other business structures:
- Protection of personal assets from business losses
- Pass-through taxation
- Easy to form with minimal paper-work
- Operational flexibility
Naming Your LLC
The first step in setting up an LLC is deciding on a name for it. A good name sets your business apart from the competition. Therefore, it is extremely important that you select a name that is unique and attractive to your potential customers. While naming your business, you must follow the naming guidelines laid down by the States.
In order to understand the naming guidelines of a particular State, you can read our free state-specific guides on how to form an LLC.
Following are some of the common naming guidelines that you should follow.
The name you select for your LLC should be unique. It must neither be identical nor deceptively similar to the name of another business entity.
Your company’s name should contain the words “limited liability company” or one of its abbreviations (LLC or L.L.C.).
You cannot use any words or abbreviations implying your LLC is connected with a government entity. Therefore, you cannot use terms like “F.B.I.” or “Treasury.”
Similarly, usage of certain words, like “Bank” or “University,” is restricted and involves obtaining the written consent of concerned authorities and additional paperwork and compliance requirements.
Doing a Name Search and Name Reservation
Before applying to reserve your LLCs name, you need to ensure the name you have selected is unique. States have a database listing the names of the existing entities.
You can use your respective State’s Business Name Search portal to search online. However, it is highly recommended that you do the name search to avoid getting your application rejected.
Once you have finalized your name, you can reserve it. The period for which it will be reserved will vary depending on the State. For reserving the name, you should apply to the concerned State authority. In most States, this will be the office of the Secretary of State.
To know the name reservation procedure, fee, and other details of your State, please read our free State-specific guides on incorporating an LLC.
Does Your Business Require a DBA?
DBA stands for “Doing Business As.” Once you incorporate your business, you have to operate it under the legal name of your LLC. However, after incorporating your business, you may feel the name you have selected for your LLC is unsuitable for the new market you are planning to enter or for a new product you are planning to launch. A DBA can become helpful in such instances.
A great example of how you can use a DBA effectively is Nike. The company was called Blue Ribbon Sports, but it decided to operate under Nike.
But remember, a DBA name alone does not protect your personal assets. To avail of the protection of limited liability, you need to form an LLC.
A DBA is also called a “trade name,” “assumed name,” or “fictitious name.” Depending on the State, you can apply with the respective authorities to register your trade name.
To understand the procedure for registering a DBA, the fee involved, and other details in your State, please read our free State-specific guides on incorporating an LLC.
Choose a Registered Agent for your LLC
A registered agent acts as a point of contact for your LLC. They receive all important communications addressed to your LLC by State authorities and forward them to the concerned person within the LLC. The registered agent shall also receive any process service concerning a lawsuit against your company.
You must appoint a registered agent for your LLC before you can start operating. The registered agent’s details ought to be provided in the incorporation documents of your LLC.
Who Can Be a Registered Agent?
States have specific requirements that must be met by a registered agent. Usually, a registered agent can either be an individual or another entity. Some of the provisions with regard to a registered agent are as follows:
- The registered agent must either be an individual State resident above 18 years or another business entity authorized to conduct business in the State.
- The registered agent must have a physical street address in the State.
- The registered agent must be available during business hours on all working days.
You can appoint yourself or any other company officer as your LLC’s registered agent. Alternatively, you may also hire the services of registered agent services. They are also called commercial registered agents in some states.
To know the requirements regarding a registered agent in your State, please read our free State-specific guides on how to form an LLC.
File the Article of Organization for your LLC
Articles of Organization is a legal document needed to officially form and legally incorporate your LLC. It is to be filed with the concerned State authority, which in most cases is the office of the Secretary of State. Once this is completed, your LLC is registered and is recognized in the eyes of the law. It is also referred to as a “Certificate of Organization” in some states.
Depending on the State you are in, the details that need to be provided in the document may vary. However, the following are some of the common requirements:
- Name of your LLC
- Details of the Registered Agent
- The management structure of your LLC (i.e., whether the LLC is member-managed or manager-managed)
The turnaround time for processing your application will vary in each State. Many states allow you to expedite your application by paying an additional fee.
In a few States, such as New York, you will need to publish a public notice of formation for your LLC.
The procedure for filing the document, the filing fee, and other related matters vary according to the State. To know more about the requirements concerning the articles of organization in your State, refer to our free State-specific guides on how to form an LLC.
Creating an Operating Agreement for Your LLC
Imagine you and a few of your partners have incorporated an LLC. Who amongst you will make decisions regarding the day-to-day affairs of the business? How will the profits be shared? Who will have authority over strategic decisions? In the absence of clarity in these matters, there are often disputes which usually end up as litigations.
An operating agreement contains the rules of your LLC’s internal operation and functioning. It also provides a framework concerning the duties of members of the LLC and its managers. You can think of it as an agreement that binds the LLC and its members.
An operating agreement is not mandatory in most states. However, it is highly recommended that you have one in place for your LLC. It helps avoid disputes and acts as a guiding force in cases of the day-to-day functioning of the LLC. If your LLC does not have an operating agreement, the affairs of the LLC will be governed by the provisions of the concerned State law.
There are no prescribed templates for an operating agreement. Accordingly, you may draft one according to the needs of your business. However, your operating agreement should ideally cover the following aspects:
- Organization Details
- Duties of Members and Managers
- Management and Voting
- Capital Contributions
- Division of Profit and Losses
- Bookkeeping Procedures
- Procedure for adding new members
- Requirements concerning Meetings and Procedures thereof
- Procedure for amending the operating agreement
Writing the Operating Agreement Yourself vs. Hiring a Service
You can create your operating agreement, or you can purchase templates that you can customize to draft the operating agreement of your LLC.
Alternatively, you may hire an attorney or a professional to prepare your operating agreement. While it may cost you more than purchasing a template online, these professionals are experts and can help you draft an operating agreement in accordance with the law.
Limits of an Operating Agreement
There are no specific formats for an Operating Agreement. However, it cannot include any matters prohibited under the law.
States have certain restrictions that it imposes on the contents of an operating agreement. For example, your operating agreement cannot vary the LLC’s right to sue and be sued, eliminate the responsibility to perform a contract entered into in good faith, etc.
To know about the Operating Agreement related laws in your State, refer to our free State-specific guides on how to form an LLC.
Obtaining an EIN for your LLC
EIN stands for “Employer Identification Number.” It is a nine-digit number allotted to an entity by the Internal Revenue Service. You can think of an EIN as a social security number for your LLC. The IRS uses the EIN to identify a business for taxation purposes.
An EIN is also referred to as Federal Employer Identification Number (FEIN) or Federal Tax Identification Number (FTIN). Your LLC will need an EIN if it falls into one of the following categories:
- If it is a Multi-member LLC
- If it is a single-member LLC that is treated as a partnership or corporation for taxation purposes.
- If your LLC hires want to hire employees
- Your LLC files excise taxes
Always remember to obtain your EIN once you have incorporated your LLC. While applying for it, the IRS will need your incorporation date and the legal name of your LLC.
You will need an EIN for your LLC to open a business bank account and apply for credit cards. You will also need it to hire employees and set up a payroll for them. Finally, you will need it to register your LLC with your respective State’s employer tax authorities.
You can apply for the EIN with the IRS free of charge. However, the easiest way is to apply online using the EIN assistant on the IRS website. Here are some important points to keep in mind:
- The EIN assistant platform is open for registration Monday to Friday (7 AM to 10 PM).
- You can only apply once per day.
- Remember to complete the application in one go. There are no options to save your progress, and once the session times out, you will have to start again.
- The session time is 15-minutes.
- EIN is issued as soon as you complete the application.
There is also an option for you to apply for an EIN by mail or fax.
Option 1: Request an EIN from the IRSApply online – OR –
Option 2: Apply for an EIN by Mail or FaxDownload form
Internal Revenue Service
Attn: EIN Operation
Cincinnati, OH 45999
Fax: (855) 641-6935
File the Annual Report for your LLC
In most states, LLCs are required to file a document called the annual report with the concerned State authorities. It is to be filed annually beginning from the year immediately after the year of your LLC getting incorporated.
The document contains updated information about the LLC. It is used by the authorities to get the latest and updated information about all the business entities operating in the State.
Depending on your State, the details to be included in the report, its due date, and filing costs will vary. Most States impose a late charge if you miss the deadline. In some cases, you may even risk having your LLC shut down if you fail to file the annual report.
To know in detail the annual report provisions for an LLC in your State, refer to our free State-specific guides on how to form an LLC.
Tax Liability for Your LLC
An LLC will primarily have two jurisdictions in tax liability: Federal and State. The way your LLC will be taxed depends upon the number of members in your LLC. There are four ways in which LLC will be taxed:
- Sole proprietorship: a business owned by a single person
- Partnership: a business owned by multiple people
- C – Corporation: income is split or segregated for taxation
- S – Corporation: tax liability is split between the business and its owners
Federal Tax Liability
LLCs are, by default, treated as ‘pass-through’ entities for tax purposes. It means the LLC does not pay a tax, but as a person who owns an LLC, you are required to pay taxes on the income and profits you earn from the business.
First, you are liable to pay federal self-employment tax (which is 15.3%) on the profits you take from your LLC. You are eligible for certain deductions like business expenses.
You are also liable to pay Federal Income Tax. The income tax you have to pay will vary depending on your income, filing status, deductions, etc.
Also, you are at liberty to treat your LLC as a corporation for tax purposes. Federal corporate taxes will apply to your LLC if you choose to do so.
If you’re a single-member LLC, your default taxation type will be that of a sole proprietor. The LLC has to report its activities under Schedule C, Schedule E and/or Schedule F of Form 1040.
If your LLC has more than one member, it will be taxed as a ‘partnership’ by default. In this case, apart from filing Form 1040, you’ll have to file your partnership return in Form 1065 and provide information in the K-1 form of each partner.
If you would like your LLC to be taxed like a C-Corp or S-Corp, you can do so by filing Form 8832 and Form 2553, respectively.
State Tax Liability
States have pass-through taxation for LLCs. It means the LLC itself does not have to pay any income tax. Instead, the members pay the tax on their income from the LLC. However, if you treat your LLC as a corporation, the LLC will need to file a separate tax return depending on the State in which it is incorporated.
Following are some of the standard taxes imposed on the LLC at the State level:
- Franchise Tax: It is imposed on LLCs by some States as a fee for the privilege of doing business in the State. The rate of franchise taxes usually varies depending on the turnover of LLCs.
- Sales Tax: Most states also impose sales and use tax on LLCs that intend to sell certain specified products or services. The LLCs will have to obtain a seller’s permit for this purpose. Once it obtains the permit, it can start collecting sales tax from the customers and remit it to the State.
- Gross receipt taxes (GRT): As the name suggests, a gross receipt tax is imposed on the business’s total revenue. Unlike the case of a sales tax, GRT is to be paid by the seller. States such as Delaware, Michigan, Nevada, New Mexico, Ohio, Oregon, etc. impose GRT.
- Withholding Tax: It refers to an amount the employers have to withhold from the employee’s salary and remit directly to the authorities. If you hire employees, your LLC must register for withholding taxes.
- Unemployment Insurance Tax: It is paid by employers to government authorities for unemployment benefits, and the rates usually vary from State to State.
To know more about the tax liability of an LLC in your State, refer to our free State-specific guides on how to form an LLC.
Permits and Licenses
An LLC must comply with State and Federal regulations. Accordingly, your business will be subject to three licensing jurisdictions: Federal, State, and Local.
Federal Licensing requirements will depend on the business activity carried on by your LLC. If your company is engaged in any area of business regulated by the Federal Government, you will be required to obtain relevant Federal Licenses and Permits.
At the State level, you will be required to obtain different licenses and permits depending on the nature of your LLC’s business. A few examples are stated below.
- Sales tax permits.
- Business operation license.
- Building permit.
- Signage permit.
- Health permit.
- Zoning and land use permit.
Also, depending on where you operate your business, you may also be required to get the local government’s license and permit.
To know in detail about the various licensing requirements of an LLC in your State, refer to our free State-specific guides on how to form an LLC.
An LLC is an excellent choice for the business you are trying to form. It is easy to form, involves minimal paperwork, and has many advantages compared to other forms of doing business.
Depending on the State you are incorporating your business in, your LLC may be eligible for a number of tax credits and other business incentive schemes. For a detailed insight into the procedure involved in forming an LLC in your State, we recommend that you read our free and comprehensive state-specific guide on how to form an LLC.
Best of luck to you and your business!