Companies of all sizes have one thing in common: They all began as small businesses. Starting small is a column for those just getting off the ground. Learn about how to make that first hire, deal with all things administrative, and set yourself up for success.
An LLC is a type of business structure that shields its owners from legal action and financial liability. Unlike a sole proprietor, who would be held personally responsible for their business dealings should something go wrong, an LLC is a distinct entity that exists separately from its members.
Setting up an LLC not only makes it less risky to start and run a business, but it can be advantageous from a tax perspective too. An LLC does not pay taxes itself. Instead, members must declare profits and losses on their personal tax returns.
In this article, we’ll take a closer look at some of the benefits of setting up an LLC, as well as the basic steps you can expect to take if you decide to structure your business in this way.
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Why set up an LLC?
Whether you’re already doing business as a sole proprietor or you’re about to launch a brand-new business venture, there are many advantages to setting up an LLC.
The most common reason for forming an LLC is to protect personal finances. Sole proprietors can be personally liable for any losses, debts, and lawsuits against them. This means that their home, savings, and any other assets can be taken to pay off business debts. An LLC exists separately from its owners, so only the assets owned by the business can be claimed by creditors.
LLCs are also tax-efficient. The profits and losses of the business are passed through to its members, who can write them off on their personal income taxes. LLC members might also be eligible for a 20 percent pass-through deduction on their tax bill.
What do you need to start an LLC?
The specific paperwork you need to successfully start an LLC varies from state to state. But no matter where you’re located in the U.S., you’ll need to do two things: File articles of organization with the appropriate state agency, and create what’s known as an LLC operating agreement.
You’ll also need a name for your new business and a legal point of contact for receiving important tax documents and court papers. Again, the rules surrounding these processes vary, but no matter where you are, here are the steps you’ll need to follow to start an LLC.
Setting up an LLC in six steps
Choose and reserve your business name
Deciding on an appropriate name for your business is about more than just branding and marketing. The name of your business will have to meet a set of criteria before it can be legally accepted, which can change depending on the state in which you’re registering the LLC.
Most important, your business name will need to be unique. To avoid confusion, it can’t share a name with (or use a name that’s deceptively similar to) any other business on record. You must also avoid including misleading words that might imply professional licensing that your business doesn’t have, such as “attorney” or “insurance.”
Once you’ve chosen your business name, you can usually pay a reservation fee to hold it while you file your LLC paperwork.
Find a registered agent
States require that a registered agent be named as a company’s formal point of contact for receiving important tax and legal documents, as well as lawsuits, subpoenas, and other papers you might be served.
The registered agent can be you, one of your employees, or a professional agency, but any registered agent must be at least 18 years old, must have an address within the state, and must be available during normal business hours.
Obtain and complete the LLC articles of organization form
The forms needed to create an LLC are called the articles of organization, and they must be properly completed and filed with the secretary of state or the state agency responsible for business filings.
Articles of organization differ from state to state, but most will list certain basic details about your business. These include:
- The name and address of the business
- The name and address of the registered agent
- The nature of the business—often this is given as “to engage in any lawful activity” to avoid limiting the scope of the business’s operations
- The duration of the business, which may be perpetual
Most state government websites provide blank LLC formation documents to ensure that no essential information is accidentally left out.
Submit the articles of organization to your state
Each state has slightly different requirements for submitting articles of organization. Find out which agency in your state handles business filings and registration (a simple web search should tell you). In most cases, it’s the secretary of state, but if it’s not, that office should be able to point you in the right direction.
Once you know where to submit the articles of organization, check to see whether your state allows online filing. You should also make note of any filing fees. Every state charges a small fee for submitting, and it’s usually no more than a couple hundred dollars.
Get hold of your state certificate
Once the articles of organization have been reviewed and approved, you’ll receive a certificate from the state formally declaring that your LLC has been registered and exists in the eyes of the law. There may be a small additional charge to receive the certificate, depending on the state.
This certificate is an important piece of paperwork that is useful when it comes to tasks such as opening a corporate bank account, obtaining business licenses, and preparing a tax filing.
Create the LLC operating agreement
An LLC operating agreement is essentially a set of rules governing how the business will be run and managed. This document establishes the rights and responsibilities of all members of the business. While you don’t need to file one with the state directly, the operating agreement is a critical legal document that many states require you to have on record.
By plainly outlining such things as members’ voting rights, how profits and losses will be shared, and what will happen if the company is dissolved or an owner dies, the business can avoid potential legal disputes and ensure more healthy, cooperative partnerships.
What to do if your LLC does business in multiple states
If your LLC does business in multiple states, you’ll need to choose a home state in which to set up a domestic LLC. Once that’s completed, you’ll then need to register your business as a foreign LLC in each of the other states the business operates in.
Registering as a foreign LLC in another state follows much the same process as the one detailed above. You’ll need to appoint a registered agent for each state your business is active in, and your business will need to follow the laws and rules of every state in which it’s registered.
Small businesses that operate in just one state tend to form an LLC in that state. Larger companies that operate across many states often choose to incorporate in states that have the lowest taxes and the most business-friendly laws. These states are commonly recognized as Delaware, Nevada, and Wyoming.
Steve Hogarty is a writer and journalist based in London. He is the travel editor of City AM newspaper and the deputy editor of City AM Magazine, where his work focuses on technology, travel, and entertainment.