What is an LLC?
An LLC is a legal entity that protects business owners from being held personally responsible for a company’s liabilities and debts. The owners of an LLC are called members. An LLC can have one member, or it can also be composed of other corporations or even several business partners.
What are the benefits of forming an LLC?
The biggest benefit is that as a business owner, your personal assets are off-limits in the event that your company is sued, goes into debt or has any other kinds of legal trouble. This means only the money and property that belong to your business are at risk.
Another big benefit of an LLC is its pass-through tax status which means is that your company won’t pay federal corporate tax. Instead, the income will “pass through” to you, which means you’ll report income and losses on your personal tax return, which will be subject to ordinary income tax. The paperwork is a little bit more complicated if your LLC has multiple members because the income will need to be allocated appropriately, but the same idea applies.
Forming an LLC means you should be keeping your company’s finances separate from your personal finances, which can help you build business credit and will help if you ever need a small business loan or other business line of credit. It can also legitimize your company in the eyes of potential clients. But you must maintain corporate formalities — such as keeping a separate bank account and signing contracts in the business’s name rather than your own.
Is an LLC right for you?
Before you make any firm decisions, talk to tax and legal professionals who deal with small businesses that can help you weigh the pros and cons.
How do I form an LLC?
Once you’ve decided to move forward with your LLC, the exact process to set it up will depend on where you live. You’ll find guidelines and requirements on your state’s Secretary of State or Department of Commerce website. But here are the general steps you’ll follow:
1. Name Your LLC. Your business needs a name, right? Check with your state’s LLC office to ensure the name you wish to use is available and complies with any restrictions, such as avoiding prohibited words or trademark violations.
2. File Your Articles of Organization. Sometimes called a “certificate of formation” or “certificate of organization,” this document provides basic information about your business to the state, such as your business name, address, a registered agent to receive legal documents and members. There is usually a filing fee associated with this paperwork, and some states have a corporate tax on top of that. For example, Utah and California have a filing fee of $70, while most California LLCs are subject to an $800 annual tax.
3. Submit a Public Notice. If you form an LLC in Arizona, Nebraska or New York, you must place a notice of your intent in a local newspaper. The amount of time your ad runs for will vary, as will the cost to publish.
4. Write Your Operating Agreement. This document is like your company’s bylaws. You don’t have to file this with your state office, and you may not need it on day one if you are the sole member of your LLC, but it’s a good way to formalize how your business operates from a legal standpoint. If you have multiple members, it also helps establish who owns what percentage of the LLC and how big each member’s share of the profits or losses are. It’s probably easiest to get an attorney to help you draft one up.
5. Set Up Your Business. Once you’ve legally established your business, you’ll want to get any licenses and permits required by state and local governments, as well as a federal employer identification number (EIN) — it’s like your business’ Social Security number (although you may not need one if you’re the only member of your LLC). You should also open a business bank account.
While you can save money with a DIY approach, you should determine whether you feel comfortable managing the process on your own. Forming an LLC can have long-term consequences for your company’s legal and financial well being, so it’s a good idea to let the pros walk you through the process.
This article is not intended as legal or tax advice. Feel free to seek advice regarding your particular circumstances from an independent legal, accounting or tax adviser.