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Starting a business is an exciting endeavor, and one of the first crucial decisions you’ll have to make is selecting the appropriate legal structure. Limited Liability Companies, or LLCs, are a popular choice among business owners in the United States. An LLC is a type of legal entity that offers multiple benefits, making it a popular choice for entrepreneurs and small business owners. Before we explore how to start an LLC, it’s important to understand what an LLC is
What is an LLC?
An LLC, or Limited Liability Company, is a kind of business entity in the United States that incorporates characteristics of both corporations and partnerships/sole proprietorships. It offers liability protection to business owners, which means that their personal assets (such as houses, vehicles, and bank accounts) are usually protected from any business responsibilities or legal claims against the company. This is comparable to the protection that a corporation offers to its stockholders.
At the same time, an LLC allows for more administration and tax freedom. An LLC can be taxed as a sole proprietorship, partnership, S corporation, or C corporation, allowing its owners to pick the tax structure that best meets their company goals. Because of their flexibility, LLCs are an increasingly common option among small business owners and entrepreneurs.
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How to start an LLC
Starting a Limited Liability Company (LLC) requires several essential steps that ensure your company is legally created and protected by state law. Here’s an easy-to-follow guide to help you through the process:
1: Choose a state
Choosing where to incorporate your LLC is an important first step. Most small company owners choose to register their LLC in their state of residence since it is simpler and eliminates extra taxes and demands. However, certain businesses prefer to incorporate their LLCs in states such as Delaware, Nevada, or Wyoming because of favorable tax rules, lower expenses, or business-friendly legislation.
Consider the following variables while selecting your state:
- Taxes and Fees: Some states do not have a sales or corporate income tax, while others may charge greater fees.
- Regulations: Some states have more relaxed rules that may assist your business operations.
- Foreign Qualification: If you incorporate in a different state, you may be required to file as a foreign LLC in your home state, which may incur additional taxes and paperwork.
2: Choose a unique name
Choosing a distinct and legal business name is critical for your LLC. The name must be different from other firms established in your state of residence, and it usually includes the word “LLC” or “Limited Liability Company” to signify the legal framework.
consider the following when naming your LLC:
- Check Availability: Use the state’s Secretary of State website to make sure your selected name isn’t already taken.
- Consider Trademark issues: Check the USPTO database to ensure that your name does not infringe on any existing trademarks.
- Avoid Restricted Words: Certain terms, such as “bank” or “insurance,” may need specific approval or extra documents.
3: Determine a management structure
Before you form your LLC, you must decide how your firm will be administered. There are two main management structures for an LLC:
Member-Managed LLC: In this structure, all members (owners) of the LLC participate in the day-to-day activities of the company. This approach is excellent for small enterprises when all owners wish to be actively involved in management decisions.
Manager-Managed LLC: This structure allows members to designate one or more managers (who may or may not be members) to oversee day-to-day activities. This form is appropriate for larger LLCs or those whose members choose to take a passive role.
Considerations for choosing a management structure:
- Member Involvement: Determine whether all members want to be fully engaged in the business or whether some prefer to be less involved.
- Operational Complexity: Think about the scale and complexity of your company. A manager-managed LLC may be more effective for larger, more sophisticated companies.
- Decision-Making Process: In a member-managed LLC, all members often have a vote on decisions, which can be advantageous for smaller teams. In contrast, a manager-managed LLC offers more efficient decision-making.
4: Appoint a Registered Agent
A registered agent is a person or corporation that receives legal paperwork on behalf of your LLC. This function is critical because it ensures that your firm receives vital information, such as litigation or government communications, on time.
You need a registered agent for:
- Legal Requirement: Almost every state requires LLCs to have a registered agent.
- Privacy and Compliance: By using a registered agent service, you may preserve your privacy while also ensuring compliance with state legislation.
Note: Bizee provides registered agent services, which can make the process easier by addressing this obligation for you.
5: File the Articles of Organization
The Articles of Organization are a legal document that legally registers your LLC with the state.
Filing this document usually requires:
- LLC Name and Address: The legal name and principal location of your company.
- Registered Agent Information: Your registered agent’s name and address
- Purpose of the LLC: Some states ask you to give a brief overview of what your LLC will perform.
- Management structure: Indicate whether your LLC is controlled by members or managers.
After you’ve completed the form, send it to your state’s Secretary of State office with the filing fee, which varies by state.
6: Create an Operating Agreement
An operating agreement explains your LLC’s structure and operating practices. While not needed by law in many states, it is an important document that outlines LLC members’ duties, how profits and losses are divided and processes for adding or eliminating partners.
Components of an Operating Agreement:
- Ownership Percentages: Determines each member’s interest in the firm.
- Management Structure: Indicates whether the LLC is administered by its members or by its management.
- Voting Rights and Responsibilities: Defines how choices will be made.
- Dissolution Process: Specifies how to dissolve the LLC.
A well-drafted operating agreement can help prevent misunderstandings and disagreements among members while also providing legal protection and clarity.
7: Get an EIN
The IRS issues Employer Identification Number (EIN), also known as Federal Tax Identification Number, which are used to identify corporate entities.
It is required for tax purposes, hiring personnel, and establishing a business bank account.
How to get an EIN?
- 1. You can apply it online directly on the IRS website to get your EIN in less than 30 minutes.
Bizee offers a convenient service to help you apply for an EIN online and obtain your EIN number quickly and efficiently
An EIN is required even for single-member LLCs to establish a clear distinction between personal and business finances.
8: Maintain compliance:
Once your LLC is established, you must maintain compliance with state regulations to keep your business in good standing. This includes filing annual reports, paying state fees, and updating state records. Staying compliant helps avoid penalties, fines, or administrative dissolution of your LLC.
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What to Do After Setting Up Your LLC
After forming an LLC, there are a few critical measures you must take to keep your company compliant, working, and protected. Here’s a thorough guide on what to do next:
Obtain Business Licenses and Permits
Once your LLC is formed, you may need to get various licenses and permits in order to legally conduct your firm. These criteria differ according to the type of company, its location, and industry laws. It is vital to:
- Research State and Local Requirements: Visit your state’s official website or local government agencies to see whether licenses and permissions are required. This may include basic business licenses, health permits, or industry-specific certificates.
- Maintain Compliance with Deadlines: Most licenses and permits must be renewed on a regular basis. Missing a renewal might result in penalties or the termination of your company’s legal status, so keep renewal dates on your calendar to prevent compliance challenges.
File your LLC in other states
If your LLC intends to conduct business outside of the state where it was founded, you might have to register as a “foreign LLC” in those states.
- Understand the requirements: Every state has specific treatment for foreign LLC registration, which normally entails filling out an application and paying a fee. You may also need to choose a registered agent in the state in which you are registering.
- File the necessary documentation: This might entail presenting a certificate of good standing from your home state, confirming that your LLC is legally compliant. To prevent legal difficulties, research the unique filing requirements for each state.
Seek LLC-specific tax advice.
Navigating tax regulations may be difficult for new LLC owners. Improper tax management can result in:
- Penalties and Interest: Incorrect files or missing deadlines may result in penalties or interest from the IRS or state tax agency.
- Missed Deductions: Not correctly accounting for all permissible deductions (such as home office expenses, business travel, or equipment) can cost your company money.
- Legal fees: In extreme circumstances, tax problems may result in an audit, necessitating the employment of accountants or legal specialists.
Divide Business and Personal Assets
To retain the legal security that an LLC provides, you must keep your personal and company assets distinct. This is how you do it:
- Open a Business Bank Account: This account is only for company expenses and income. This division simplifies accounting and improves your LLC’s liability protection.
- Document financial transactions: Ensure that any transactions between you and your LLC are properly recorded. If you withdraw money from the company, it should be documented as a “owner’s draw,” which helps to distinguish between personal and business funds.
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