What is llc for small business owner?
Although generally easier to form than a corporation, there are some administrative and compliance tasks to be done. To help you form an LLC successfully and in compliance with state law, follow these eight steps.
Step 1: Choose a state in which to form your LLC Although you can choose to form an LLC in any state—even if the LLC won’t be doing any business there —most LLC owners choose to form an LLC in the state in which they plan to do business—which in many cases is the state they live in. One reason for that is that if the LLC is formed in a state where it is not doing business—Delaware is the usual choice for these LLCs—the LLC will have to register as a foreign LLC (aka foreign qualify) to do business in the state where it is doing business, which can increase formation and administrative costs.
It’s important to note that the cost, taxation, and LLC laws vary from state to state, making some states more advantageous for certain small business owners. Read more about how to select a state for LLC formation.
Step 2: Choose a name for your LLC
In order to form an LLC, you’ll have to choose a name that is not already on the Secretary of State’s records as being the name of another domestic or qualified LLC or other business entity. Many sole proprietors operate under a registered “doing business as” (DBA) name or trade name and may want to use that as their LLC’s legal name.
To ensure the availability of the name you want for your LLC, whether it’s registered as your DBA name or not, you should conduct an LLC name search on your formation state’s website to determine whether your desired name is available. If you’re not ready to file your LLC formation document quite yet, it is a very good idea to reserve the name. Many states allow you to do that for a small fee and short time period.
It’s also a good idea to conduct a trademark search of the name you want to avoid intellectual property infringement or confusing your customers.
Step 3: Choose a registered agent In forming an LLC or registering an existing LLC to transact business in a foreign state, you are required to have a registered agent in the state of formation or qualification. Many new business owners are either unfamiliar with the term registered agent or do not know the purpose of a registered agent.
A registered agent, also known as an agent for service of process, receives important legal notices and tax documents on behalf of an LLC. These include important legal documents, notices, and communications mailed by the Secretary of State (such as annual reports or statements) and tax documents sent by the state’s department of taxation. A registered agent also must be available to receive service of process (sometimes called Notice of Litigation), which are legal documents—typically a summons and complaint, that provide notice that a lawsuit has been filed against the LLC. Other court documents such as garnishment orders and subpoenas are also served on the registered agent.
While the owner of an LLC can choose to serve as the LLC’s registered agent, there are a number of compelling reasons why business owners—even the smallest ones—choose a registered agent service provider to assist with this important requirement. Among other things, if the registered agent is not available when these time-sensitive documents are delivered, or if the person receiving them mishandles them, it can cause the LLC serious problems. The registered agent must also have a physical address in the state, and cannot use a PO Box.
Step 4: Prepare an LLC operating agreement
An LLC operating agreement is required in nearly every state. And although in most states it can be oral, it is highly recommended that every LLC have a written operating agreement. As the name implies it is an agreement among the members and between the LLC and the member or members as to how the LLC will be operated. Even if you are the only member it is important to have an operating agreement. It shows you respect the LLC’s separate existence (and can help avoid piercing the veil), it gives you a chance to put in writing what you want to happen in certain circumstances such as if you can no longer manage the business and allows you to opt out of certain default provisions of the LLC statute that you might not want the LLC to be governed by.
It is particularly important for multi-member LLCs to have a well-drafted operating agreement. This document will clearly spell out the division of ownership, labor and profits, and often heads off disputes among the owners. It should detail, among things, who has authority to do what, what vote is required to approve certain transactions, how membership interests can be transferred, how new members can be added, how distributions, profits and losses will be split, and more. It is recommended that the operating agreement be reviewed by your attorney to be sure that all the bases are covered.
Step 5: File your LLC with your state
To make your new LLC officially exist you must file LLC formation documents (also known as a Certificate of Organization, Certificate of Formation, or Articles of Organization) with the Secretary of State’s office or whichever department handles business filings in the state in which you are forming. Filing fees vary across the U.S.
Did you know?
What about LLC Articles of Organization?
Although it may be common to hear of an LLC being “incorporated”, the correct way to describe the creation of an LLC (or any entity type other than a corporation) is to say that it has been “formed” or “organized”. “Incorporation” and “Articles of Incorporation” are terms that apply to a corporation (regardless of whether it is taxed as a C corporation or S corporation).
While each state’s LLC formation document is different to some extent, there are several common elements. These include the following:
Standard forms for the articles of organization for an LLC are generally available from each state. The person who formed the LLC must sign the paperwork. In most cases that does not have to be a member or manager. In some states, the registered agent’s consent to act as registered agent is also required.
Once approved and filed, the state will issue a certificate or other confirmation document. The certificate serves as legal proof of the LLC’s status and can be used to open a business bank account, obtain an EIN, and so on. Some states may also require that you publish a notice, often in a local newspaper, confirming the formation of the LLC.
Step 6: Obtain an EIN
After establishing the business entity, you must apply to the Internal Revenue Service for an employer identification number (EIN). This is the identification number your LLC will use on all its bank accounts, as well as income and employment tax filings. In addition, in each state in which the LLC will be doing business, you must apply to the state's tax department for a sales tax identification number and register with the state's labor department.
Step 7: Open a business bank account
This step is not a legal requirement but is a key best practice for anyone who is creating an LLC and is one of the steps outlined in our guide: 10 Steps to Starting a Business. It is crucial to separate business finances from personal ones. This is one of the main factors courts consider when deciding whether to pierce an LLC’s veil and hold the member liable for the LLC’s debts. A business credit card can also be used to keep personal and business transactions separate, as well as to help build business credit.
Most banks require company details, such as formation date, business type, and owner names and addresses. Contact your bank about requirements prior to opening an account.
Step 8: Register to do business in other states (if necessary)
If the LLC you formed is going to be doing business in more than just the formation state, you will have to register—or foreign qualify—in each “foreign” state. That generally requires filing an application for authority with the Secretary of State. A Certificate of Good Standing is often required as well. The LLC will also have to appoint and maintain a registered agent.
Many factors are used to determine whether a company is transacting business in a state, and therefore needs to foreign qualify. Some of the common criteria include whether your company -
Note that different states have different criteria. To determine whether your LLC needs to foreign qualify in a certain state, it is best to seek the legal advice of an attorney.
When forming a business, one of the most important steps is deciding on the business structure. There are several business entity options available that each present different advantages and disadvantages.
LLCs versus C Corps, S Corps, and DBAs Understand the key benefits of LLCs, C Corporations, S Corporations and DBAs before deciding which entity type is right for you. Read our article on Comparing Company Types: Understanding C Corp, S Corp, LLC and DBA Business Structures
LLCs versus S Corps While the S corporation and LLC both have pass-through taxation, the S corporation lacks the flexibility of an LLC in allocating income to the owners. Additionally, an LLC may offer several classes of membership interest while an S corporation may only have one class of stock. Visit our article on LLCs versus S corporations to learn about other key differences.
LLCs versus Partnerships and Sole Proprietorships Learn about the advantages and disadvantages related to taxation, asset protection and other key criteria faced by LLC owners, sole proprietors and partners, whether general or limited partnerships in our article Sole Proprietorships, Partnerships and LLCs are Commonly Used Entities.
Although generally easier to form than a corporation, there are some administrative and compliance tasks to be done. To help you form an LLC successfully and in compliance with state law, follow these eight steps.
Step 1: Choose a state in which to form your LLC Although you can choose to form an LLC in any state—even if the LLC won’t be doing any business there —most LLC owners choose to form an LLC in the state in which they plan to do business—which in many cases is the state they live in. One reason for that is that if the LLC is formed in a state where it is not doing business—Delaware is the usual choice for these LLCs—the LLC will have to register as a foreign LLC (aka foreign qualify) to do business in the state where it is doing business, which can increase formation and administrative costs.
It’s important to note that the cost, taxation, and LLC laws vary from state to state, making some states more advantageous for certain small business owners. Read more about how to select a state for LLC formation.
Step 2: Choose a name for your LLC
In order to form an LLC, you’ll have to choose a name that is not already on the Secretary of State’s records as being the name of another domestic or qualified LLC or other business entity. Many sole proprietors operate under a registered “doing business as” (DBA) name or trade name and may want to use that as their LLC’s legal name.
To ensure the availability of the name you want for your LLC, whether it’s registered as your DBA name or not, you should conduct an LLC name search on your formation state’s website to determine whether your desired name is available. If you’re not ready to file your LLC formation document quite yet, it is a very good idea to reserve the name. Many states allow you to do that for a small fee and short time period.
It’s also a good idea to conduct a trademark search of the name you want to avoid intellectual property infringement or confusing your customers.
Step 3: Choose a registered agent In forming an LLC or registering an existing LLC to transact business in a foreign state, you are required to have a registered agent in the state of formation or qualification. Many new business owners are either unfamiliar with the term registered agent or do not know the purpose of a registered agent.
A registered agent, also known as an agent for service of process, receives important legal notices and tax documents on behalf of an LLC. These include important legal documents, notices, and communications mailed by the Secretary of State (such as annual reports or statements) and tax documents sent by the state’s department of taxation. A registered agent also must be available to receive service of process (sometimes called Notice of Litigation), which are legal documents—typically a summons and complaint, that provide notice that a lawsuit has been filed against the LLC. Other court documents such as garnishment orders and subpoenas are also served on the registered agent.
While the owner of an LLC can choose to serve as the LLC’s registered agent, there are a number of compelling reasons why business owners—even the smallest ones—choose a registered agent service provider to assist with this important requirement. Among other things, if the registered agent is not available when these time-sensitive documents are delivered, or if the person receiving them mishandles them, it can cause the LLC serious problems. The registered agent must also have a physical address in the state, and cannot use a PO Box.
Step 4: Prepare an LLC operating agreement
An LLC operating agreement is required in nearly every state. And although in most states it can be oral, it is highly recommended that every LLC have a written operating agreement. As the name implies it is an agreement among the members and between the LLC and the member or members as to how the LLC will be operated. Even if you are the only member it is important to have an operating agreement. It shows you respect the LLC’s separate existence (and can help avoid piercing the veil), it gives you a chance to put in writing what you want to happen in certain circumstances such as if you can no longer manage the business and allows you to opt out of certain default provisions of the LLC statute that you might not want the LLC to be governed by.
It is particularly important for multi-member LLCs to have a well-drafted operating agreement. This document will clearly spell out the division of ownership, labor and profits, and often heads off disputes among the owners. It should detail, among things, who has authority to do what, what vote is required to approve certain transactions, how membership interests can be transferred, how new members can be added, how distributions, profits and losses will be split, and more. It is recommended that the operating agreement be reviewed by your attorney to be sure that all the bases are covered.
Step 5: File your LLC with your state
To make your new LLC officially exist you must file LLC formation documents (also known as a Certificate of Organization, Certificate of Formation, or Articles of Organization) with the Secretary of State’s office or whichever department handles business filings in the state in which you are forming. Filing fees vary across the U.S.
Did you know?
What about LLC Articles of Organization?
Although it may be common to hear of an LLC being “incorporated”, the correct way to describe the creation of an LLC (or any entity type other than a corporation) is to say that it has been “formed” or “organized”. “Incorporation” and “Articles of Incorporation” are terms that apply to a corporation (regardless of whether it is taxed as a C corporation or S corporation).
While each state’s LLC formation document is different to some extent, there are several common elements. These include the following:
Standard forms for the articles of organization for an LLC are generally available from each state. The person who formed the LLC must sign the paperwork. In most cases that does not have to be a member or manager. In some states, the registered agent’s consent to act as registered agent is also required.
Once approved and filed, the state will issue a certificate or other confirmation document. The certificate serves as legal proof of the LLC’s status and can be used to open a business bank account, obtain an EIN, and so on. Some states may also require that you publish a notice, often in a local newspaper, confirming the formation of the LLC.
Step 6: Obtain an EIN
After establishing the business entity, you must apply to the Internal Revenue Service for an employer identification number (EIN). This is the identification number your LLC will use on all its bank accounts, as well as income and employment tax filings. In addition, in each state in which the LLC will be doing business, you must apply to the state's tax department for a sales tax identification number and register with the state's labor department.
Step 7: Open a business bank account
This step is not a legal requirement but is a key best practice for anyone who is creating an LLC and is one of the steps outlined in our guide: 10 Steps to Starting a Business. It is crucial to separate business finances from personal ones. This is one of the main factors courts consider when deciding whether to pierce an LLC’s veil and hold the member liable for the LLC’s debts. A business credit card can also be used to keep personal and business transactions separate, as well as to help build business credit.
Most banks require company details, such as formation date, business type, and owner names and addresses. Contact your bank about requirements prior to opening an account.
Step 8: Register to do business in other states (if necessary)
If the LLC you formed is going to be doing business in more than just the formation state, you will have to register—or foreign qualify—in each “foreign” state. That generally requires filing an application for authority with the Secretary of State. A Certificate of Good Standing is often required as well. The LLC will also have to appoint and maintain a registered agent.
Many factors are used to determine whether a company is transacting business in a state, and therefore needs to foreign qualify. Some of the common criteria include whether your company -
Note that different states have different criteria. To determine whether your LLC needs to foreign qualify in a certain state, it is best to seek the legal advice of an attorney.
When forming a business, one of the most important steps is deciding on the business structure. There are several business entity options available that each present different advantages and disadvantages.
LLCs versus C Corps, S Corps, and DBAs Understand the key benefits of LLCs, C Corporations, S Corporations and DBAs before deciding which entity type is right for you. Read our article on Comparing Company Types: Understanding C Corp, S Corp, LLC and DBA Business Structures
LLCs versus S Corps While the S corporation and LLC both have pass-through taxation, the S corporation lacks the flexibility of an LLC in allocating income to the owners. Additionally, an LLC may offer several classes of membership interest while an S corporation may only have one class of stock. Visit our article on LLCs versus S corporations to learn about other key differences.
LLCs versus Partnerships and Sole Proprietorships Learn about the advantages and disadvantages related to taxation, asset protection and other key criteria faced by LLC owners, sole proprietors and partners, whether general or limited partnerships in our article Sole Proprietorships, Partnerships and LLCs are Commonly Used Entities.
A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, you should check with your state if you are interested in starting a Limited Liability Company. Owners of an LLC are called members.
A few facts concerning L
A small business LLC, or limited liability company, is a business type that utilizes the benefits of a partnership such as avoiding double taxation while also taking advantage of a liability shield similar to a corporation.
An LLC may be run by any number of owners, officially known as members.
An unlimited number of members is allowed and they can be made up of other companies or individuals.
LCs are as follows:
LLCs best suit businesses with the following needs:
Although the formation of an LLC is less complex than a corporation, the filing fees for the state are typically similar.
Members should complete the following when forming their LLC:
Additionally, owners are strongly recommended to create an operating agreement for their LLC because it establishes financial structure and operating guidelines.
An operating agreement includes the following information:
Members must retrieve local permits and sign up for a trade name if the business will be operating under a name other than its formal LLC name. If a decision is not made with the IRS, the LLC's income will be dispersed to the owners just like it is with a partnership or sole proprietorship. It is also possible for an LLC to choose to be taxed as a C or S corporation.
Some LLCs prefer to be taxed as an S corporation because the income of the business will then be included in their individual tax returns.
In order to give to Medicare and social security, LLC members are typically required to pay a 15.3 percent self-employment tax on the income of the business.
Under an S corporation election, members can acquire a decent salary from the income of the business and then allocate the leftover income to unearned distributions.
The self-employment tax is not applied to unearned distributions; therefore, the amount owed in taxes will be decreased.
As long as members run their business sensibly and keep their individual finances separate from the business, they will not be held responsible for the business's actions. In other words, the members' personal assets are protected from creditors that are going after the business.
An LLC can choose to act as a pass through entity which means that the earnings of the business will not be taxed on the company level but rather on the members' individual tax returns. This benefit simplifies the process of filing taxes and also minimizes tax hardships in the event of financial losses.
An LLC can be operated by its members, allowing them to play a part in the everyday operations, or by external managers who may be more knowledgeable when it comes to operating a business. Most states automatically assume that an LLC is member-managed unless the members' file with the proper state agency telling them differently.
Another advantage of LLCs is that the amount of paperwork and fees are quite mild comparatively; however, the actual amounts vary from state to state. For instance, Arizona charges a fee of $50 to file the Articles of Organization while Illinois charges $500.
Ultimately, the formation is easy enough that legal help is not necessary; however, it is strongly recommended that the assistance of a lawyer or accountant be considered.
- Cost: An LLC usually costs more to form and maintain than a sole proprietorship or general partnership. States charge an initial formation fee.
- Transferable ownership. Ownership in an LLC is often harder to transfer than with a corporation.
