The structure of any business establishment has a great bearing on its operations, the official regulations that apply to it, and the manner of profit or loss sharing that is followed. The LLC or Limited Liability Company is a good business structure to adopt because it offers many of the benefits that a regular corporation enjoys including the recognition of the business as an entity separate from its owners.
At the same time, an LLC is a far less complicated business structure and can be adopted quickly and easily with fewer formalities. There are tax advantages too which an LLC can avail of. Many small businesses and entrepreneurs are today opting to incorporate themselves as Limited Liability Companies.
Navigation Menu on How to Form a a LLC
1. Advantages of Forming an LLC
3. Forming a LLC
- 3.1 Step 1: Identify the State
- 3.2 Step 2: Choose a Name
- 3.3 Step 3: Study the Regulations
- 3.4 Step 4: Formalities
- 3.5 Step 5: Articles of Organization
- 3.6 Step 6: LLC Operating Agreement
- 3.7 Step 7: Legal Entity
1. Advantages of Forming an LLC
The biggest advantage of converting your small business into an LLC is the liability protection it offers. The owner of an LLC is not personally liable for its dues. This means that the owner’s personal assets like his house, vehicle or savings cannot be taken away to fulfill the dues owed by the company.
There is much more flexibility in the operations of an LLC when compared with a regular corporation. As the LLC has no shareholders, there is no stipulation for periodic meetings and disclosure to them. Decision-making is thus much simpler and quicker than with a corporate entity. This makes the LLC much more adaptable to market conditions and business needs.
Profit sharing is left to the discretion of the owners. This is also a great advantage because it allows for a more flexible management of funds within the company. Expansion of the business and retention of profits to meet contingencies are all decisions that can quickly be taken and implemented in an LLC.
An LLC is not taxed as a corporate as far as Federal taxes go. This is because an LLC is formed under a state statute. The IRS does not consider LLC as a classification for tax purposes. Depending on the number of owners or ‘members’ as they are called, the tax implications vary. Single owner enterprises are taxed as sole proprietorship concerns while those with more than one owner may be taxed as a partnership. The LLC owners can also opt to be taxed as a fully functional corporate body.
3. Forming a LLC
As opposed to the time consuming and procedure intensive corporate formation, an LLC can be created quickly, within a matter of a few hours. Typically, an LLC has only a few owners and quite often just a single owner. This makes the incorporation process much simpler and involves very little complications. However, it is necessary to understand the specific regulations governing the creation of LLCs in your state before you begin the incorporation process. The provisions and stipulations vary from state to state across the US, with some states, including Delaware, Wyoming and Nevada, affording special benefits to such business entities.
3.1 Step 1: Identify the State
Identify the state in which you are going to form your LLC. For ease of operations, it is best to form it in the state where you intend to conduct most of your business. However, if your business is such that location or distance do not hamper operations, then give importance to the special benefits offered by some states in the US.
Other stipulations may also vary from state to state. Understand the requirements of the state you wish to form the LLC in before you move to step 2. You can find state specific information by visiting the official secretary of state website. Click here for some useful links (http://entrepreneurs.about.com/od/generalresources/a/secretarystate.htm).
3.2 Step 2: Choose a Name
Choose a name for your business. Make sure that it isn’t the same as an existing business name. If your company has the same name as another, in addition to causing confusion to customers, you will also have problems while forming the LLC. While choosing the name avoid even those that are similar sounding or spelled similar to company names in existence. It is important to create a clearly defined identity for your business in order to establish a strong association between your products and your company name.
There may be some specific rules about how LLCs must be named in your state. A clarification with your Secretary of State’s office should give you an idea of the rules to follow. The general rule is that the name must clearly show the status of the company with the addition of the words ‘Limited Liability Company’, ‘Limited Company’, ‘LLC’, or other accepted abbreviations. You can reserve the name you have chosen until all the formalities are completed.
3.3 Step 3: Study the Regulations
Study the regulations in force in the state where you wish to form the LLC. The Articles of Organization form from the Secretary of State’s office is necessary for this step. In some states, these are called ‘Certificate of formation’ or ‘Certificate of Organization’. This document outlines the structure, ownership, capital creation and other details about the entity you are about to create. In effect, this document is the legally accepted paperwork which shows when, where, and how the company was created and outlines the manner of its functioning. However, management details or ownership specifics are not required for the completion of the Articles of Organization.
Check if any other formalities have to be completed before your make an official filing of the Articles of Organization. Some states require that you publish an announcement of the impending LLC creation in local newspapers. Also check the amount that you will need to pay as filing fee in your state. Some states require an additional corporate tax, which is to be paid at the time of incorporation.
Complete the Articles of Organization and file it with your Secretary of State office. You will have to designate a ‘registered agent’ who will be authorized to receive any legal documents on behalf of your company in future. This person’s name and details will need to be mentioned in the Articles of Organization. He/ she can be one of the owners of the company or someone else. Include the filing fee and corporate tax, if any, while submitting the documents.
With the filing and approval of the Articles of Organization, your legal formalities are complete and your LLC is now officially in business. However, there are a few more steps to be carried out before you can actually start operations. These are usually not required by law, but it is advisable to get these processes done to ensure that no problems crop up during the functioning of the business.
The LLC Operating Agreement is the next step. This document is critical for the efficient and disruption free functioning of the company. It outlines clearly the ownership rules and operational guidelines agreed upon by all ‘members’ of the LLC. This prevents any future misunderstandings among the owners, which can lead to a complete breakdown of the business model. The Operating Agreement comprehensively covers all aspects of the business with respect to ownership, responsibility and rights. Some of the points it may include are:
- Profit/ loss sharing
- Individual owner responsibilities and rights
- Management decision making processes
- Transfer of ownership by sale or as legacy to heirs
An Operating Agreement is not mandatory in most states. However, having one drawn up for your business gives it the structured operational direction of a corporation. This agreement can also prove invaluable in establishing the corporate status of your entity in court to avoid personal liability.
Considering its importance, it is advised to take legal help in drafting your Operating Agreement. While single member LLCs can still use online forms for creating their agreements, those with more members can benefit from help from an experienced lawyer.
The LLC is now a legal entity. There are however some formalities in every state which new businesses must comply with. There could be necessary licenses and permits that you may require to conduct various business activities including buying and selling within the state. Make sure that you have all of these essential authorizations from the state government before you start conducting your business.