Many people today choose a business as a limited liability company to invest in. These are diversified in different sectors, including retail stores, restaurants, electronics, real estate, IT, and e-commerce companies. Sometimes people make choices without knowing a complete reality, and then they wish they knew while starting their first LLC. Here are few questions that usually people ask and should know the answers to before forming an LLC and operating one.
What is an LLC?
An LLC is a hybrid business structure for private companies and combines the aspects of partnerships. It provides owners with limited liability when a business fails or sees any loss. LLCs included S corporations and C corporations, which are among the most popular structures of the business. These companies provide limited liability protection to the owners of the business. This means that the owner of the LLC is not individually liable for all the debts, losses, and obligations of the business. Perhaps the most obvious advantage to starting an LLC is protecting your assets by controlling the liability to the resources of the business.
What is the most informal way to form an LLC?
For simple LLCs, it means having a single owner; the easiest way to form it is to use an online business development service to do the work. Some of the common services we know are, CorpNet.com, ZenBusiness.com, and MyCorporation.com. If you are considering forming more complicated LLCs, with more than one owner or complicated ownership and management, a lawyer experienced in LLCs may be more suitable.
In what state an LLC should be formed?
Before starting an LLC, you must know that it is formed by filing in agreement with the state law requirements. So, your first step is to decide what state you should organize your LLC in. Precisely, in the US, Delaware is often chosen to establish an LLC because of its well-developed state law. But, it is recommended by many LLC specialists to organize the business in the home state to save on government laws, fees, taxes, filing obligations, and complexities.
What does it cost to form an LLC?
Here are some of the typical costs that you need to know before starting a business.
- LLC Filing Fees: The starting fees range from $35 to $500, depending upon the state.
- Fee for Service Provider for Creating LLC: Different online websites have numerous programs to form an LLC and charge different fees ranging from $100 to $500. If you plan to use an attorney, then the fees might go higher, depending on the complexity.
- Registered Agent Fee: If you are planning to form an LLC, then you should have a “registered agent for service of process” in the state where you have registered your LLC. It is a company or an individual who agrees to accept your legal documents on behalf of the LLC if it is litigated. If you want to hire a professional registered agent, then it will cost you around $100 to $400, or else you can make yourself, your employees, or your attorney as your registered agent.
- Annual Franchise Tax: Planning a franchise as your LLC may cost you a minimum annual franchise tax of $100 to $800.
- Business License Fee: Every business owner knows that he/she needs to get the license before starting a business and pay the license fee. The business license fee usually depends on the location and type of your business and may typically cost you around $50 to $100.
What are the tax benefits of LLC?
An LLC can take advantage of “pass-through” tax treatment to avoid double taxation and pay one level of tax, unlike C corporations. Also, in LLC, only the owners of the LLC are taxed, similar to S corporations.
What documents are needed to form and operate an LLC?
Some of the key documents and forms required for an LLC include:
- Article of Organization: This document is also called as “Certificate of Organization” and filed with the Secretary of State.
- LLC Operating Agreement: This agreement is made among the owners of the LLC while settling the financial requirement, capital contribution, voting and management rights, and other responsibilities of the owner.
- Application for Business License: This application is required to be submitted to the state government.
- Employee Identification Number: You are required to obtain Employee Identification Number (EIN) for your LLC to pay the federal tax. You can apply for EIN easily through an online service.
- Bank Account Form: As an owner, it is essential to own a banking account to separate the company’s funds from your personal funds. You need to fill certain forms in the bank to open an account for your LLC, together with a copy of the Articles of Organization of your LLC to show its legal entity.
What to name an LLC?
While naming your company, you need to remember the following points:
- Your company’s name should end with “Limited Liability Company,” or any specific abbreviation permitted.
- Your name must be distinguishable from all the domestic and international LLCs filed within the Secretary of State commission.
- Terms such as a bank, trustee, or insurance company, should not be included in the names if prohibited by state law.
- The name should not contain the words “incorporated,” “corp.” “corporation,” or “Inc.”
- Organize trademark search so that you don’t violate any party’s trademark.
- Check on the obtainability of receiving the “.com” domain name related to the business.
How to own and manage an LLC?
The owners of the LLCs are called members, and if there is a single owner, he/she will contain 100% of the LLC’s interest. Precisely, ownership in an LLC usually approves percentage to the owner regarding the LLC’s finances, profits, debts, funds, losses, cash distributions, and a right to vote. Specifically, an LLC is managed by one managing member, an outside manager, a group of members, or by all the members of the company. You must remember that an LLC does not have a board of directors, unlike corporations.
What does an LLC Operating Agreement include?
Here is the key point that you should include in your operating agreement:
- The amount of capital contribution.
- Remedies or penalties if the contributions in the capital are not made.
- How the profit and loss will be distributed among the members?
- Who will manage the LLC, and how the officers will be appointed?
- Procedures for meeting and dissolution.
What are the disadvantages of forming and operating an LLC?
Typically, many investors do not invest in LLC as they want to make their investment in a corporation. In some states, the minimum annual franchise tax also includes gross revenue tax, which can sometimes go over $250,000. For an LLC, additional accounting fees will be incurred to issue an annual IRS K-1 form. More so, since there is the taxation of “pass-through”, if there is a profit in the year, then the owners are required to reflect their percentage interest in the profits as income in their individual tax returns, whether they have received cash distributions or not.
In a nutshell, an LLC is an appropriate business if there is one or a small number of owners involved. However, if there are multiple owners, then you should opt to start a C or S corporation. Hope, this article has helped you if you are planning to start an LLC or operating one.