LLCs are popular business entities used by many business owners when forming their company. This article will go over everything you need to know about LLCs, include how to get an LLC.
What is an LLC?
A Limited Liability Company , or LLC is a legal entity that can be formed to operate a business. LLCs are unique from corporations, sole proprietorships, and partnerships because they give business owners liability protections similar to a corporation while giving the owner the choice between having their business’s income taxed on their personal tax return or separately like corporate income.
A business owner is considered a separate legal entity from their LLC, so their personal assets are protected from any lawsuits or creditors who may go after the LLC. This is an excellent benefit for any business that may be subject to risks or debts.
In addition, an LLC is a pass-through entity for tax purposes. This means that profits from the business pass through the company and are reported on the owner's individual tax returns. This allows business owners to avoid double taxation that is often associated with corporations.
Advantages of an LLC
Some other benefits of forming an LLC include:
- Ability to raise capital from investors
- Simpler and less expensive to form than a corporation
- The owner of the LLC maintains more control over the company
- An LLC provides credibility to a company
An LLC is a popular choice for new small business formation. Like a sole proprietorship , an LLC is easy and inexpensive to form, although filing fees vary from state to state. In addition, an LLC provides liability protection for the owner, just like a corporation.
Disadvantages of an LLC
Forming an LLC does have some downsides that should be considered when choosing the correct business entity for your company.
An LLC protects you from personal liability, but it will not protect you or any other owners from losses due to fires, floods, or an economic downtown. Even if you form an LLC, it is vital to have a business insurance policy for your limited liability company.
Although LLCs will shield your assets from lawsuits or creditors, there are two instances where you may still be held personally liable, even under an LLC.
- Personal Wrongdoing. If you personally do something wrong, like negligently cause an injury to someone else, you can be held liable, even if the accident is related to the business.
- Personal Guarantees. If you or another owner of the LLC agrees to guarantee a loan personally, you will be held liable for that loan even though it is associated with the LLC. In this scenario, if the LLC defaults on the loan, creditors can come after personal assets because the money was personally guaranteed.
For more information about LLCs, check out this article.
How To Get an LLC
A limited liability company is relatively easy to form, and the formation process can usually be completed online. Every state will have its own laws regulating LLC formation, so it is essential to know your state's laws or contact a corporate lawyer who can assist you.
To form an LLC, follow these steps:
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Step 1: Pick a Name.
Your company will need a unique name that complies with your state's business laws. Most states require that LLC business names end with an LLC designator. You cannot have the same name as any other registered business in your state, so you may want to run a search through your state's corporation website to ensure that your business name is unique.
Step 2: File Articles of Organization.
You cannot have a legally operating LLC without filing Articles of Organization with your state. This document includes important information like:
- The name of the LLC
- The effective date of the formation of the LLC
- The name and address of the registered agent of the LLC
- The company's principal office
- The business purpose of the LLC
- Duration of the business
- Signature of the authorized representative
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Step 3: Appoint a Registered Agent.
The registered agent of an LLC is designated to receive legal correspondence on behalf of the company. The company’s owner is usually appointed as the registered agent; however, sometimes, the owner will appoint an attorney or a registered agent service.
Step 4: Decide on a Management Structure.
LLCs can be managed in two different ways, member-managed or manager-managed. Depending on the company's size, purpose, and needs, these two structures provide various advantages and disadvantages for owners. You should become familiar with both management structures and consult with a business attorney to find out which structure is right for your company.
Step 5: Create an Operating Agreement.
Most states do not legally require LLCs to have an operating agreement like they do corporations, however operating agreements are an asset to any company. These documents dictate how the company will be operated and run. Without an operating agreement, your company will be subject to state operating laws.
To continue reading about limited liability companies, click here.
What Are the Costs to Set Up an LLC?
There are several costs associated with forming a new LLC. These costs will be more than those for a sole proprietorship but substantially less than costs for forming a corporation. The costs to set up an LLC vary by state and your business need.
One-Time LLC Costs
One-time LLC costs you expect to pay when forming an LLC include:
Filing Fees. The filing fee for your Articles of Incorporation will vary by state. They generally range from $40 to $500.
Registered Agent Fees. Registered agents are required for LLC formation. Most of the time, an owner will appoint themselves as the registered agent and avoid this fee. Some business owners choose to hire a registered agent service. These costs will vary by company and location.
Business License Fees. Many states require that new businesses obtain licenses and permits. In most states, business license costs will range from around $50 to $100, depending on the permit or license.
Reserving a Business Name. Your business name must be unique to be registered with your state. Some owners have a great name that they want to reserve until they can officially form their company. The cost to reserve a name with the state is usually between $10 and $50.
Ongoing LLC Costs
After the LLC has been formed and the formation fees have been paid, ongoing fees and costs will be required to keep the LLC legally operating and in compliance with state and federal laws.
Ongoing LLC costs can include:
Annual Fees. Most state business laws require Limited liability companies to file an annual report. Typically, the LLC will be charged a fee to file the report, but some states do not charge this fee. Annual reports keep LLCs in compliance with state laws.
Annual Franchise Tax. An annual franchise tax is an additional fee that some states charge for doing business in the state. A limited liability company will need to pay this fee to stay operational. Most state franchise taxes are between $100 and $400 ; however, California charges $800, which is the highest franchise tax in the country.
Business License Renewal Fees. Any permits or licenses you obtained for your business when forming the LLC will probably need to be renewed periodically. Business license renewal fees generally range from $20 to $100.
Get Help Forming an LLC
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