Is a Limited Liability Company (LLC) the right setup for your business? Whether you are in the process of starting a new business or changing your business structure from a sole proprietor to a legal entity, you probably have a lot of questions—including what exactly is an LLC?
This article will explain what an LLC is, and how to start an LLC. Let’s start with the basics.
What is an LLC?
You know that it stands for Limited Liability Company—but what does that mean? An LLC is a business entity that allows a sole proprietor or group of entrepreneurs to incorporate their business with the benefit of not having to file separate company profit and loss taxes—company taxes can be filed with the owners’ personal taxes—and also protects the owner from business debt and liability.
Most entrepreneurs prefer to operate their business as an LLC because of the flexible structure, favorable taxes, and reduced liability.
Why should I start an LLC?
The Speed and Ease: Operating a small business can involve time-consuming or overly complex regulatory tasks. Luckily, forming an LLC is a simple and efficient process—and one of the main reasons that the government created LLCs in 1977. To start and maintain an LLC in most states, you simply need to pay a fee, file the correct paperwork, apply for any additional business licenses or permits, and maintain compliance on a quarterly or annual basis.
Liability: The primary reason most business owners choose to form an LLC is to take advantage of the personal asset protection that owners or members receive when operating a properly structured LLC. Personal asset protection is one of the main reasons entrepreneurs incorporate their business.
If your business’ finances go sour, or the business defaults on a loan, then your personal property won’t be at risk—unlike in a Limited Partnership or unincorporated sole proprietorship.
The limited liability aspect of a properly formed LLC can be viewed as a safety net. In the event of bankruptcy or a lawsuit filed against your business, your personal property will be protected. And, let’s face it, young businesses can be a risky venture—especially in the early stages of learning.
LLC Advantages and Disadvantages
LLC Tax Advantages
The favorable tax structure of LLCs is another benefit that attracts small business owners. The LLC is considered a “pass-through entity”—which means that any earnings or losses are passed on to the owners. Instead of your business paying taxes, the members will pay them simply by paying their own income tax.
Business profits and losses only get reported on members’ personal income tax returns, so you can avoid double taxation—like in other forms of business organization. In the eyes of the IRS, an LLC is not a separate, taxable entity.
Some disadvantages of forming an LLC versus another entity include:
- It can be difficult to raise money, especially from venture capital firms
- Your business’ growth potential might be limited—you cannot issue shares of stock to bring in investors
- LLCs are treated differently on a state-by-state basis
- No board of directors
- All revenues are subject to self-employment tax rates (including Medicare and social security contributions)
To find out if starting an LLC is right for your business, or if starting a corporation would be a better, use our Business Formation Wizard to answer some questions that will guide you in the right direction. If you’re ready to form an LLC, get started with these five steps.
How to start an LLC
Step 1 – Name Your Business
You have an incredible business idea, the talent to develop it, and the drive to execute it. What will you name your new business? If you are ready to start an LLC for what you have been operating as a sole proprietor, you probably already have a preferred name to submit with your LLC application. When choosing a name for your business, it is important that it resonates with the type of customer or audience that you want to attract. A unique name will not only be memorable to your potential customers but it will be less likely to be in use by an existing LLC in your state.
Pro Tip: Save time by deciding on two alternate names in your brainstorming session. If your preferred business name is unavailable, you will have two additional names ready.
We can help: The incorporate.com team can conduct a comprehensive name search for you to determine if your preferred business name exists as another company in your industry or region.
Step 2 – Submit Your Articles of Organization
The Articles of Organization, sometimes referred to as the Certificate of Organization, is a basic document that is filed during your LLC formation that effectively establishes your company as an LLC—and reserves your company’s name.
Step 3 – Create an LLC Operating Agreement
It’s very important that new LLC’s write an Operating Agreement, especially if there is more than one member.
The goal of an LLC Operating Agreement is to outline the owner and operator guidelines for your business, and basically work as the LLC’s bylaws. The agreement should clearly state the breakdown of ownership, voting power, responsibilities, meeting protocol, and what should happen when a party wants to sell their ownership rights.
The Operating Agreement is an essential document because it lays the foundation for how your business will operate and adds credibility to your LLC. Every state has a set of basic operating rules for LLCs that control your business’ operations in the absence of a written agreement. While it is nice to have default rules in place, it is important to have an Operating Agreement tailored to your LLC to avoid confusion or disagreements between owners.
Step 4 – Do you need to publicly announce your LLC?
Not every state requires every LLC to publicly announce its existence, but many states—like New York—have rules that require new LLCs to publish an official formation statement in a local newspaper.
We can help: Our team of incorporation specialists are up to date with the LLC public announcement guidelines set by the secretary of state’s office.
Step 5 – Determine which permits and licenses your business needs.
At this point, you’ve started an LLC and are almost ready to conduct business. Every local and state jurisdiction has rules to abide by and stay in compliance with while you’re in business. After you have formed your LLC, you’ll want to do business license research to determine which permits and licenses your business needs to operate in your industry and location.
Necessary licenses and permits might include:
- A standard business license
- A seller’s permit
- A federal employer identification number
- A zoning permit
Ready to start an LLC?
Make it happen with incorporate.com, from formations to ongoing business filings, we help you stay on track as your business grows. We specialize in a range of business services, such as:
- Forming an LLC or Corporation
- Registered Agent Service
- Obtaining an Employer Identification Number (EIN)
- Annual Reports
- Business License Research
- DBA “Doing Business As” Name
- Operating Agreements
- Certified copies of LLC or corporation documents
Want to learn more? Get our free incorporation toolkit, complete with a step-by-step guide, business plan template, and more!