Perhaps you’ve finally decided to start your company or take your small business to the next level. Choosing a business entity is one of the most significant decisions you’ll make. You can choose from various legal business structures, each with its unique benefits. A limited liability company (LLC) is one of the most flexible business entities you can establish. 

Many American small business owners looking to form a company or incorporate their businesses use an LLC. Unlike sole proprietorship and general partnership (unincorporated and non-legal entities), an LLC helps protect the owner’s assets while offering other benefits. Benzinga spotlights LLC and explains the nine steps involved in incorporating your small business. 

What is an LLC and How Does it Work?

An LLC is a legal business entity or structure that offers limited liability protection to its owners (known as members). If the company fails, incurs a debt or gets sued, the members’ personal assets (personal savings, cars, and real estate properties) are not exposed to risk. Corporations also offer limited liability protection to their owners (referred to as shareholders); however, corporations have to deal with double taxation, first on profit at the corporate level and another on the personal income level when the shareholder receives dividends. 

LLC members enjoy pass-through taxation similar to a sole proprietorship or general partnership. In pass-through taxation, members report their shares of business profits and losses on their individual tax returns. Additionally, LLCs can elect to be taxed as corporations, which can be especially advantageous for mega LLCs. Essentially, an LLC blends the best elements of a corporation, sole proprietorship and general partnership. Its flexible organizational and management structure and affordable setup and maintenance cost add to its uniqueness.

In LLC, owners are called members. Members can be one person (single-member LLC) or several people (multi-member LLC). There’s no limit to membership. The manager oversees and controls the business and can be a  registered agent, an individual chosen by the members or the members themselves. Anyone can register an LLC in the U.S., including foreigners and foreign companies.

9 Steps for How to Form an LLC

Forming an LLC involves the following nine simple and hassle-free steps regardless of the type.

Decide the Name of Your LLC

Your company name is the first contact potential clients or customers have with your brand, so you must be creative when choosing a name for your LLC. When brainstorming for a name, consider the state laws guiding the naming of an LLC. The law differs across states; still, there are some commonalities. For instance, your business name must include the phrase limited liability company or its abbreviation (LLC). Your LLC name must not include words that may confuse it with a government entity (e.g., Bureau, Treasury and Department). Restricted or prohibited words (like attorney, bank and insurance) may require extra paperwork. 

An excellent way to ensure that you’re on track is to search the Secretary of State website in the state you choose to form your business. That way, you’ll also determine if an existing LLC bears your target name. It is also a great idea to scan through Google, social media and available domains to confirm what’s been taken, especially if your business targets customers other than those from your state. Once you find a perfect name, file and pay to reserve it so the state won’t give it to another person before you complete your LLC. Holding time for businesses name varies across states, so inquire about that as well. 

Draft Your LLC Operating Agreement

Although most state laws do not mandate an operating agreement, drafting one is highly recommended, especially in a multi-member LLC. It can also come in handy when single-member LLCs decide to admit new members. An operating agreement serves as a roadmap or bylaw governing the LLC. It defines members’ rights and responsibilities, ownership interests or equity, profit or loss allocations and how the company will dissolve if it fails. It is often updated as business realities change. You can draft an operating agreement using a template or hire an attorney or registered agent to help you write one.

Obtain an Employer Identification Number (EIN)

Next, you need to get your Employer Identification Number(EIN), a unique numerical combination the government uses to identify your LLC. Think of it like your business Social Security number (SSN). Not only is your EIN unique to your business or LLC, but it’s essential for specific business necessities like banking, taxation and recruitment. If you’re a U.S. resident, you can fill out an application online, in which case you’ll need your SSN.

The process is entirely free and takes about 15 minutes. You get your EIN immediately upon completion. Don’t worry, though. If you’re not a U.S. resident, you can still get your EIN without a hassle by properly completing Form SS-4 and sending it to the IRS by fax or mail. Remember, receiving the number will take a few weeks after mailing.

File Your LLC’s Articles of Organization

The next step is to file your articles of organization, also known as a certificate of formation or certificate of organization in some states. You can download the form from the website you used to search for your LLC’s name. The requirement or content of the articles of organization may vary from state to state. But generally, it contains essential details like your business or LLC name, business purpose, principal business address, registered agent, management structure and duration of the LLC. 

Ensure to provide all the relevant information neatly and your signature. Some states may also require the signature of the registered agent. Others, like New York, may need two copies of the articles of organization. One is stamped and returned to you, and the other is kept with the state, so be sure to fill up the requisite number of copies before filing to avoid rejection. Mind you, filing fees apply and vary from state to state — $100 in Wyoming, $200 in New York and $300 in Delaware, for example.

Register With Your State and Local Government

If you file your business in a state other than your state of residence, you must register it as a foreign LLC in your home state. This process meant that you fiel similar paperwork to the one you filed when incorporating your LLC but with filing fees and other charges unique to your home state. You’ll pay taxes in both your state of formation and your residential state where you are foreign-qualified. You may not need a registered agent since you reside there and can handle the paperwork. You might also need to file for licensing and permits from the city or county. 

Open a Business Bank Account

Opening a separate bank account for your LLC helps you separate your personal finances from your business, providing more protection for your personal assets. It is an excellent approach to maintaining your LLC’s corporate veil. For non-residents, the benefits include the ability to trade in dollars and access affordable international transfers regardless of location, increased credibility, savings, higher liquidity and access to loans. Keep in mind that you’ll be liable for taxes for any revenue generated by conducting a business within the U.S. 

While opening a U.S. bank account can be complicated, especially for conventional brick-and-mortar banks that often require in-person visits and proof of address in the form of utility bills, there are excellent digital or online banks with more relaxed qualifications criteria. Although requirements vary across each digital banking platform, you’ll probably need your articles of organization, a virtual mailing address or that of your registered agent, your EIN, your state registration, international passport and your LLC operating agreement. 

Choose the Right Insurance for Your LLC

Although your personal assets are protected if the business gets sued for damages or by creditors, the same does not apply to the business assets. Creditors can seize your company assets via a judicial injunction. You need insurance coverage for your LLC. An excellent LLC insurance product can help compensate your customers for damages or lost property, rebuild your shop when damaged and help pay wages. Various options exist, including professional liability, worker’s compensation, commercial property and commercial auto insurance. General liability insurance is popular among LLCs, but your choice will depend on your business’s core needs. 

Stay Compliant With Ongoing LLC Requirements

To keep enjoying the benefits of your LLC, you must stay compliant with the ongoing requirements. These include filing your tax returns when due, renewing the requisite operating licenses or permits, filing your annual report and ensuring your business and personal accounts are separate. You must also maintain your registered agent. If you’re foreign-qualified, you must also keep the compliance requirements unique to your state. 

Use the Benefits of an LLC for Tax Purposes

Besides personal liability protection, flexible tax options are another excellent benefit of an LLC, and you should leverage it to its fullest potential. Unlike a corporation, the pass-through tax system is highly beneficial since it means you won’t have to pay taxes twice. However, you can also elect to be taxed as an S-Corp, and save some money on self-employment tax. Unlike an LLC, where all your profits are subject to self-employment tax, in S-Corp, only your salary is subject to self-employment taxes, reducing the burden.

You can also elect to be taxed as a C-Corp to take advantage of the tax benefits inherent in income splitting. However, only take this route if you have a Certified Public Accountant (CPA) to guide you, as it can get complicated. You can also leverage tax deductions. For instance, you can claim up to a 20% deduction via the Qualified Business Income (QBI) deduction. Other business deductions may also apply. You can research more online or hire a CPA to guide you on what is applicable.

Empower your Entrepreneurial Dream Today by Starting an LLC

An LLC is undisputedly among the most popular and beneficial business entities because of its flexible tax options, low setup and maintenance cost, simple management and organization structure and personal liability protection. While Benzinga has provided an elaborate explanation of how to start an LLC, you must understand that the processes are highly simplified and fast. In most states, you can file your business online and get your certificate of incorporation the same day or even within hours. So why not kick-start your journey to becoming your own boss by incorporating your business?

Frequently Asked Questions