When you start a new business, one of the first decisions you have to make is to select a legal structure. A limited liability company (LLC) protects you from personal liability and can save you money on taxes. However, getting an LLC license isn’t as simple as filling out a form and getting a stamp of approval.
In this post, we will cover:
Let’s get started:
What Is An LLC License?
This may come as a surprise when you ask, “what is an LLC,” but there’s actually no such thing as a physical LLC license. It’s more of a concept, much like the title of a house.
An LLC license is a term that describes the paperwork you file to form your LLC. This paperwork is evidence that you run a business registered as an LLC in your state.
How To Get An LLC License?
Now that we’ve clarified what we mean by “LLC license,” let’s discuss how to get your LLC License:
Select Your Business Name
If you don’t already have a name in mind when thinking about how to start an LLC, now’s the time to get thinking. Good business names are easy to remember and help establish your brand’s identity.
When starting an LLC, you must be mindful of other legal considerations. First, you have to include either “LLC” or “Limited Liability Company” as part of your name. Before filling out an LLC license application, make sure there isn’t another business already using your name. Your state’s business office can inform you if another organization already uses that name.
Some states may also restrict you from using certain words in your LLC’s name, like “insurance” or “bank.” Check your list’s restricted word list before selecting a business name. You don’t want to discover your LLC is invalid after jumping through all the required hoops.
If you want your official name and the name you use in everyday conversation and wherever else you can to be different, you can also register a “Doing Business As” (DBA) name.
While not required, you should also determine if your business name infringes on existing trademarks. You can check for this using the Trademark Electronic Search System (TESS) database.
File Your Articles Of Organization
The articles of organization are the legal documents you file when you apply for an LLC license. While they sound complicated, these documents are pretty easy to fill out. They spell out the key details about the legal operation of your business, including:
This information is all pretty straightforward, but double-check your document before submitting it to the state. If any information is inaccurate, you may risk legal problems in the future.
Draft An Operating Agreement
Even if your state doesn’t require an operating agreement, we strongly recommend having one. Your operating agreement outlines the rules and regulations you’ll follow when running your business.If you’re not a single-member LLC, this document is crucial when you and your partners make key business decisions. Operating agreements often state:
Your operating agreement can get much more detailed, but those are basics.
Nominate Your Registered Agent
The registered agent for your LLC is charged with handling the necessary tax, legal, and government correspondence for your business. Usually, businesses designate an LLC partner or member to serve as the registered agent. Before you volunteer, please note that as a registered agent, you must have a physical registered address, not a P.O. Box. In other words, some of your personal information becomes public record.
Some states (Arizona, New York, and Nebraska) require you to publish a notice of your LLC formation in an initial report filing or your local newspaper. Contact your state’s business filing office to determine if you need to do this, and if they require anything else.
Obtain Permits And Licenses
Check your state’s Small Business Administration website to determine what permits and licenses you’re required to get. These permits and licenses vary depending on what industry you’re in, and the rules of your local and state governments.
Get A Bank Account For Your LLC
By definition, an LLC is a business structure that legally exists as a separate entity, shielding you from debts and liabilities your company may accumulate. You can’t accomplish this without your LLC having its own bank account.
Banks require certain documents (e.g., your business license, required permits, articles of organization, etc.) to open an LLC account. Consult your bank to see what you need to bring when you open your account.
Benefits Of An LLC
Getting your LLC license comes with several excellent benefits. Here are the main ones:
Limited Personal Liability
Liability is the main difference between an LLC and a sole proprietorship or partnership. There’s no distinction between you and your business in sole proprietorships and partnerships. You are responsible for any debts and liabilities your business assumes. If your employee or business partner is accused of negligence, or if your business is sued or you have to file bankruptcy, your personal assets are at risk.
An LLC legally separates you and your business. With few exceptions, your company’s debts are not your own, and if your business gets sued, your personal assets, including your home and bank account, are protected.
LLCs don’t have an official federal tax designation. Instead, they can adopt the tax status that most benefits them, whether it’s a sole proprietorship, a partnership, an S corporation, or a C corporation.Unless you choose to be taxed as a corporation, the IRS will designate your organization as a disregarded entity LLC. You won’t be required to pay federal taxes. In some cases, you can also avoid paying state income taxes. Instead, the IRS collects taxes through your personal income tax return. You’ll also be required to pay self-employment taxes.
Owner And Management Flexibility
As long as your company remains an LLC, you can keep your designation as a disregarded entity, regardless of how many owners and types of owners your LLC has. C corporations lack this privilege, and while S corporations can reap these benefits, they have multiple ownership restrictions (e.g., limited number of shareholders, no foreign shareholders, etc.). Owners of corporations also have fixed management structures and must meet annually to make key business decisions.
LLCs aren’t bound by a formal structure and enjoy more freedom when deciding how to run their business. Most states require LLCs to submit annual or biannual reports, but that’s usually the extent of the paperwork. Meanwhile, corporations typically have exhaustive record-keeping requirements, need to hold annual shareholder meetings, and often pay annual fees to the state they’re doing business in.
Profit Distribution Flexibility
Corporations are required to distribute profits based on the number and type of shares their shareholders hold. In an LLC, profit distribution isn’t tied to ownership percentage. If Brady and Kim each own 50% of their LLC, but Brady dedicates twice the amount of time Kim does, they can agree to distribute profits based on the work they put into their company. Conversely, if Brady owns 70% of the LLC and Kim owns 30%, they can agree to split the profits 50/50.
How Much Is An LLC License?
States require a filing fee along with these documents—usually between $50 - $200. To give you an idea of costs, here’s what a few states around the country charge:
LLC Filing Fee
LLC Annual Report
Is An LLC The Right Legal Structure For You?
Ultimately, that’s for you to decide. Every business and industry is different, and what’s advantageous for one may not be great for another. That said, here are three situations where you’ll usually benefit from forming an LLC
Still unsure if forming an LLC is right for you? We’ve got the answers to some of your most common questions:
Yes. Your business license and your LLC license serve separate purposes, and you need both to legally run your business.
Simply visit your Secretary of State’s website and query “form an LLC” in the search bar.
You can get started on your LLC paperwork by visiting your Secretary of State’s website.
Paying yourself from an LLC is known as an “owner’s draw,” and it’s pretty straightforward. To pay yourself, simply transfer a portion of your organization’s cash reserve from your business account to your personal one, or divide the cash among partners based on agreed-upon percentages.
Closing an LLC is a multi-step process that requires filing a Certificate of Dissolution with the state, settling all your remaining debts, distributing any remaining assets, meeting all your tax obligations, and notifying creditors that you’re closing. Depending on the state in which you're operating, you may also have to meet specific taxation requirements and submit annual reports until your LLC is dissolved.
Obtaining an LLC license can be complicated. Luckily, most of the steps are easy-to-follow, and you only have to go through the process once. Once you get your LLC license, you’re ready to run a successful business!Are you ready to become an entrepreneur or grow your existing business? Check out The Lazy Man’s Guide to Living The Good Life, and discover how to maximize your potential based on your interests and skills.