What is an LLC?
Before we get into what needs to be done to become an LLC, it's important to provide a quick overview of what an LLC is. An LLC stands for Limited Liability Company. Many business owners ask themselves "what does an LLC do for my business?" The primary benefit of forming an LLC is the protection it provides for personal assets in the event of a lawsuit. But there are also additional benefits, such as taxation, paperwork requirements are less rigid than if the business were established as a corporation, and adding "LLC" to your business adds credibility to your product or service.
Another commonly asked question is "how is a limited liability company taxed?" The tax benefit of an LLC is a result of what is called "pass through taxation." What this means is profits flow through to the owners of the business, and their portion of the profits are then reported on their individual tax returns; profits only get taxed one time (whereas a c-corporation experiences double taxation). It should also be noted that these entities don't pay federal income taxes like a c-corporation (or s-corporation). However, LLC's are still subject to standard business requirements like sales tax, unemployment taxation, income tax witholding, and some states require a franchise tax be paid.
Keep in mind, if you're a small business that is just getting started, you can establish yourself as an LLC and as your business grows you can always create a new entity as a corporation with the LLC as a subsidiary, although record keeping can become a bit more complicated. The primary consideration here is you don't need to worry about being constrained to a limited liability company. If your business grows to the point where you want to become a corporate entity, it is possible.
Steps to Create an LLC
There are five general steps to setting up an LLC:
1. Select the state in which you would like to establish your business entity.
2. Establish a name for your Limited Liability Company.
3. Establish your Registed Agent (the individual responsible for sending and receiving official documents on your business' behalf).
4. Establish and file your Articles of Organization.
5. Write an Operating Agreement.
Selecting the State in Which You Form Your LLC
If you are establishing a domestic LLC, each state has rules and regulations related to operating business entities. While many businesses choose to form in Delaware due to their business friendly laws, for a small business it probably doesn't make sense to choose this as a "home," unless it is in close proximity to the state. The additional costs associated with this don't typically outweigh the benefit.
The cost of setting up an LLC with a state varies between $50 and $600, and there is an annual fee to maintain your registration. Pending your industry, size, and scope of operations you may want to hire and attorney or accountant to provide guidance, which will be an additional expense.
Naming Your LLC
There really isn't much to say about this aspect. Here you are free to be creative and establish a name that you feel is best for your business. In the "old" days many business owners would start their name with "A...[fill in the blank]" because their business would show up first in the yellow pages, but those days are long gone and not too many people use the yellow pages anymore. At this point it's all about marketing. The key is to make your name memorable and package your business around the name.
Establishing A Registered Agent
Your registered agent is the person that will be responsible for handling the official documents and paperwork for your business. It can be yourself, or you can have someone specifically identified to handle the paperwork. Because LLC's can be owned by other LLC's, and because there can be multiple owners of a limited liability company, there must be someone established as the responsible person that will handle official paperwork for the business.
Filing Articles of Organization
While it has a 'fancy' name, your Articles of Organization is just the legal document that gets submitted to the state in which you form your limited liability company. It provides the critical information about your business entity; LLC name, purpose of your business, add the name and address of the registered agent. Often the state will provide the Articles of Organization template, and you fill it in while you complete the process to file to become an LLC. In the state of Illinois, for example, the process can be completed online and it takes about 30-60 minutes to file for an LLC. As a side note, it takes around 2-4 weeks to officially form your business, but many states offer expedited services for a small fee if you don't want to wait.
Writing Your Operating Agreement
Establishing your Operating Agreement will take some time. While it doesn't need to be completed immediately, and it doesn't need to be extremely detailed at first, it should get some attention and be fairly articulate. The LLC Operating Agreement is the outline of ownership and operations, and it is a legal document. If there are multiple members for your limited liability company, you will want to articulate the details of the working relationship that will exist among members/owners, managers, and any financial related segmentation.