Who could have guessed at the outset of the pandemic that today, the U.S. is once again the most notable hotspot for new company formations in the world? For several reasons, limited liability companies (LLCs) are a popular choice for new businesses, but they are only one option when forming a business.
A limited liability company, or LLC, is a legal business entity that combines aspects of corporations and sole proprietorships. An LLC can have a single owner or multiple owners, who are referred to as members. The company's shares may not be divided equally, creating opportunities for both senior and junior members, according to the IRS.
Why choose to start a LLC
The main reason businesses prefer an LLC over a traditional corporation is the paperwork. Corporations must keep a massive amount of paperwork, such as bylaws, minutes from various meetings, and stock ledgers. LLCs have significantly less paperwork, with the most important being the filing of an annual report.
There are five prerequisites for forming an LLC:
- Your LLC must be given a name.
- The names, addresses, and signatures of the LLC's members must be provided.
- Every LLC must have a registered agent, who can be the owner or a third-party service.
- Proof of the company's physical address
- The management style that the company employs
How to form a LLC
1. Choose your state
For most new business owners, the best option is to form an LLC in the state where you live and plan to do business in. If your business will have a physical presence (storefronts, offices, sales reps, etc.) in different states, you'll need to register a foreign LLC in those states. Every state has its own requirements, doing extensive research on the advantages and disadvantages of each state is very important.
2. Name your LLC
The first step in forming an LLC is to select a business name. You must conduct an online business name search to ensure that your LLC name is unique, and you must follow your state's naming guidelines.
There are certain regulations regarding choosing a name:
- The phrase "limited liability company" or one of its abbreviations must appear in your company name (LLC or L.L.C.).
- Your company name cannot contain words that could lead to confusion between your LLC and a government agency (FBI, Treasury, State Department, etc.).
- Restricted words (e.g., bank, attorney, university) may necessitate additional paperwork and the participation of a licensed individual, such as a doctor or lawyer, in your LLC.
3. Choose a registered agent
A registered agent is a person or business who sends and receives legal documents on your company's behalf. Official correspondence such as legal summons and state filing notices are examples of these documents. When forming an LLC, most states require that the business name a registered agent. Your registered agent must be either a resident of the state in which you do business or a corporation authorized to do business in that state.
4. File LLC Articles of Organization
To form an LLC, you must file your formation documents with the state's business division, usually the Secretary of State. The Articles of Organization are also known as the Certificate of Formation or Certificate of Organization in some states. You can fill out the information on the formation documents yourself, send them in the mail, or hire an LLC formation service to do it for you.
5. Create an LLC Operating Agreement
An LLC operating agreement is a legal document that details an LLC's ownership structure and member roles. Although most states do not require an operating agreement, it is still a good idea to draft one when forming an LLC.
6. Get an EIN
The last step is to get an EIN. An Employer Identification Number (EIN), also known as a Federal Employer Identification Number (FEIN) or Federal Tax Identification Number (FTIN), is your LLC's equivalent of a Social Security number (SSN). To hire employees or open a business bank account, you'll need an EIN. You can obtain your EIN for free through the IRS website, fax, or mail.
Because of its combination of flexibility and personal asset protection, the LLC is an excellent choice for a wide range of business startups. When it comes down to it, we believe the LLC is the best structure for a wide range of businesses. Whether or not an LLC is the best business structure for your company is determined by a number of factors, including taxation, personal asset protection, company structure, and others.