Tips for Starting a Limited Liability Company
A Limited Liability Company (LLC) is a type of business that allows its owners to have limited personal liability for the debts and actions of the company. The owners of an LLC are categorized as members such as corporations, individuals, foreign entities and other LLCs. When forming this business structure it is important to familiarize yourself with its legalities.
Select a business name in accordance with your state’s LLC rules. Many states require the business name to include “LLC,” “Limited Liability Co.,” or a similar term. Conduct a name search for the proposed company to ensure that the name is not already in use. If the name is available, reserve the name for a fee. In addition to verifying that the proposed company’s name is not in use, ensure that the intended name does not violate another company’s trademark.
File the articles of organization with your state’s LLC filing office. Most states use the term “articles of organization” while others use “certificate of formation” or “certificate of organization.” Depending on the state in which you form your LLC, you will be required to pay a filing fee of $100 or more. You can prepare the documentation on your own or with the assistance of a lawyer. These documents must be signed by all members involved in the business.
Develop an LLC operating agreement. This agreement describes the rules for owning and operating the business. Features of the agreement include the percentage that each member holds in the company, each member’s rights and responsibilities, members’ voting power, the allocation of profits and losses, management of the LLC, policies for holding meetings and voting and “buy-sell” provisions. The latter determines the outcome of a member’s stake in the company if that member becomes disabled, dies or decides to sell his or her interest.
Publish a notice in a local newspaper in regard to your intent of establishing an LLC in that state. This notice must appear for a period of weeks depending on your state’s requirements. On completion of its publication cycle, submit an affidavit of publication to your LLC filing office. Only a few states require you to publish a notice of the formation of your LLC. Check with your LLC filing office in your state to verify if this procedure must be completed.
Apply for the necessary licenses and permits to perform business as an LLC. You must acquire the licenses and permits that new businesses are required to obtain before opening up their doors for business. Such documents may include a federal employer identification number, a zoning permit, a business license also known as a tax registration certificate and a seller’s permit.
The most common forms of business entities include LLCs, corporations, sole proprietorships and partnerships. Corporations bear several similarities to LLCs. Both business entities are established through state filing and there are less ownership limitations. Furthermore, these business structures protect the personal assets of their owners from the companies’ liabilities.
Business owners forming LLCs in lieu of corporations can reap several benefits when establishing such business structures. With LLCs there are less corporate formalities such as attending regular meetings with the board of directors and recording meeting minutes as is the case with corporations. Therefore, LLC members are saved the hassle of compiling paperwork and keeping track of issues discussed at corporate meetings.
While S corporations are unable to have more than 100 stockholders in their businesses, LLCs do not have these ownership restrictions. S corporations require its stockholders to be a US resident or citizen and challenges may exist with placing the businesses’ shares into a living trust. LLCs and C corporations do not operate under these restrictions.
Another advantage of LLCs versus corporations is their ability to deduct operating losses. Active members of LLCs have the freedom to withhold operating losses against the income they earn regularly as permitted by law. The same applies for the shareholders of S corporations. However, shareholders of C corporations are unable to do so.
LLCs also have flexibility when filing taxes. They can be classified by default as “pass through” entities similar to sole proprietorships or partnerships for tax purposes. Furthermore, LLCs can choose to be categorized as corporations for tax purposes. This categorization can be as a C corporation or an S corporation.
The best states for forming an LLC include Delaware and Nevada. Delaware Chancery Court is a special court in the state that deals with business matters. Therefore, business owners of the state of Delaware seeking to form LLCs will have a speedy case hearing before a judge with vast experience in business law. Like Delaware, Nevada also offers a similar level of privacy to business owners establishing LLCs. Additionally, Nevada LLCs are charged very low annual fees.
