Do you have a business idea to allow you to become your boss and set your hours?
There's never been a better time to start your own business. There are more opportunities and resources available to entrepreneurs than ever before.
However, learning how to make money without a job also means considering the legal aspect.
The first thing you need to do when starting your own business is to choose the proper legal structure. This will determine how much taxes you pay, your personal liability, and more.
One popular option for small businesses is to form an LLC (limited liability company). This type of business offers several advantages, and in this article, I'll share with you all you need to know about starting an LLC successfully.
Let's get right into it.
What Is An LLC And What Are The Benefits Of Forming One?
An LLC, or limited liability company, is a type of business structure that offers its owners protection in their personal capacity. At the same time, it also provides them with certain tax advantages.
If your LLC is sued or incurs debt, your assets (such as your home or savings account) are protected. This differs from a sole proprietorship or partnership, where your assets are at risk.LLCs also benefit from "pass-through" taxation, meaning that the LLC is not taxed on its profits. Instead, owners (whether earning money online or offline) are taxed on their personal income tax returns. If you're the owner, this can save you significant money come tax time.
How To Create An Llc
Now that you know the basics of what an LLC is and the benefits of forming one, let's look at what you need to start an LLC.
Choose A Business Name
The first step in starting an LLC is choosing a business name. This may seem like a small task, but it's one of the most critical steps in the process.
Your business name should reflect what your business does and be easy for customers to remember. It's also essential to make sure that your name is available and not already being used by another company.
Then, it's vital to ensure that the name you've chosen for your LLC is available and not already used by another company.
You can search your state's business registry or use an online business name availability checker to check availability.
Assign A Registered Agent (Or Set Your Business Up As The Registered Agent)
Every LLC must have a registered agent, i.e., the person or company that accepts service of process on behalf of the LLC. In other words, if your LLC is sued, the registered agent will be the one to receive legal documents on behalf of the company.
The registered agent also needs to have a physical address in the state where the LLC is formed and be available during business hours so as to be able to accept any legal documents the business receives and forward them to the right person in a timely manner.
The registered agent can be an individual or a company; in some states, you can even list your LLC as its own registered agent.
Draft Your Operating Agreement
An operating agreement is a document that outlines the ownership and governance structure of your LLC. This agreement is not required in all states, but it's a good idea to have one regardless.
Not only does an operating agreement help keep your LLC organized and running smoothly, but it can also help prove to the IRS that your LLC is a legitimate business entity.
For more information on the documents needed to form an LLC, check out the next section of this article.
Obtain An Employer Identification Number (Ein) From The Irs
An Employer Identification Number, or EIN, is a number made of nine-digits and given by the IRS and used to identify your LLC for tax purposes.
If you have more than one owner in your LLC, you will need to obtain an EIN. If you are the only owner, you may not need an EIN, depending on how you plan to structure your business.
Open A Business Bank Account
The next step is to open a business bank account for your LLC. This will help you put a divider between your personal and business finances separate, which is essential for tax and liability purposes.
When opening a business bank account, you generally have to provide your LLC's Employer Identification Number or EIN.
Obtain A Certificate From The State
In most states, you will need to obtain a certificate of formation or articles of organization from the secretary of state to form your LLC officially.
This document is sometimes called a certificate of existence or a good standing certificate.
Apply For Any Licenses, Permits, And Zoning Clearance Required By Your City Or State
Depending on the type of business you are operating, you may need to obtain specific licenses and permits from your city or state.
For example, if you are running a restaurant, you must obtain a food license. You will need to get a liquor license if you operate a business selling alcohol.
It's essential to research the licensing requirements for your specific business type and make sure you comply.
If you are doing business in more than one state, you may need to register your LLC in each state where you have a physical presence. This is typically required if your LLC has employees or property in another state.
File An Annual Report
In most states, LLCs are required to file an annual report with the secretary of state. This report is typically due every year on the anniversary of your LLC's formation date.
The purpose of the annual report is to update the state on any changes to your LLC, such as a change in registered agent, address, or owners.
What Do You Need To Start A LLC In Terms Of Documents?
Forming an LLC involves a lot of documents, and knowing which ones you need can be confusing. Here is a list of the most common documents you will need to form an LLC.
Internal Revenue Service (IRS) Form SS-4
This form is used to obtain an Employer Identification Number (EIN) for your LLC. The EIN is comprised of a nine-digit number that’s given by the IRS and used to identify your LLC for tax purposes.
You will need an EIN if you have more than one owner in your LLC, you plan to file taxes as a partnership, or you want to open a business bank account.
Articles Of Organization
The articles of organization are the official documents filed with the state to form your LLC. This document includes information such as the name and address of your LLC, the names of the members or owners, and the purpose of your business.
Depending on the type of business you are operating, you may need to obtain specific tax registrations from your state or local government.
For example, you must obtain a sales tax license if you sell taxable goods or services. When hiring employees, you must register for unemployment insurance and workers' compensation.
Initial And Annual Reports
Most states require LLCs to file an initial report when they are formed and an annual report every year after that. This helps ensure that the state has current information on your LLC, such as the members' or owners' names and addresses.
An operating agreement is a document that outlines the ownership and operating procedures of your LLC. This agreement should be created when your LLC is formed and can be updated as needed.
The operating agreement should include information such as the names of the members or owners, how profits and losses will be distributed, and what happens if a member wants to leave the LLC.
Name Reservation Application
Most states require LLCs to reserve a unique name for their business before they can file their articles of organization. You must submit a name reservation application to the state to do this.
Costs Of Forming An LLC
The costs involved in forming an LLC can vary depending on the state in which you form your business and the specific requirements of your LLC. However, you can typically expect to pay filing fees for your articles of organization, registered agent fees, and publication fees. You may also need to pay for an operating agreement and business licenses.
To add some numbers into the mix, the articles of organization can cost between $50 and $200. Registered agent fees are typically an annual fee between $100 and $300. Publication fees can vary depending on the company's location and advertising rates, but you can expect to pay several hundred dollars for this service. Operating agreements can cost anywhere from $100 to $1500, depending on the complexity of the agreement and the number of members in your LLC. Business licenses can also vary widely in price, depending on the type of business you are operating.
You can expect to pay several hundred dollars (maybe even a couple of thousands) in fees when you form your LLC. However, the costs will be worth it if you are serious about starting a successful business.
Ongoing LLC Costs
There are also ongoing costs associated with LLCs, such as annual registration fees, business permits and licenses, and annual report fees. Depending on the state in which your business is located, these fees can range from a few hundred dollars to several thousand dollars per year.
However, the ongoing costs of an LLC are typically much lower than the costs of operating a corporation.
Tax Implications Of Forming An LLC
One key factor to consider is the concept of single-member vs. multi-member LLCs.
There is a difference between how these two entities are taxed.
Single-member LLCs are taxed the same as sole proprietorships, while on the other hand, multi-member LLCs fall under partnerships taxation. This means that the business is not taxed, but the owners are taxed on their profits.
However, both types of LLCs can elect to be taxed as corporations. This is known as an S corporation. You must file a corporate tax return if you elect to be taxed as an S corporation.
The main advantage of S corporations is that they offer limited liability protection for the owners. This means that the owners are not personally liable for the debts and liabilities of the business.
Structuring Your Business To Get The Most Benefit From Your LLC
As you form an LLC, there are some key considerations to keep in mind to get the most benefit from your business structure.
First, ownership flexibility is an essential advantage of LLCs. You can have as many or as few owners as you like; they can be individuals, corporations, or other LLCs. This flexibility allows you to tailor the ownership of your business to your specific needs.
Second, LLCs offer flexible profit distributions. The members of an LLC can choose how the business profits are distributed. This means that you can spread the earnings in the most advantageous way for the business members.
Third, limited personal liability is another critical benefit of forming an LLC. The members of an LLC are not personally liable for the debts and liabilities of the business.
Fourth, LLCs offer some significant tax advantages. LLCs can be taxed as sole proprietorships, partnerships, or corporations. This flexibility allows LLCs to minimize their tax liability.
Finally, management flexibility is another crucial advantage of LLCs. LLCs can be managed by their members or by a designated manager. This flexibility allows businesses to tailor the management of their business to their specific needs.
Difficulties Of Starting A Limited Liability Company
Before I conclude, here are some of the top difficulties business owners face when starting an LLC. Knowing what they are ahead of time can help you better prepare.
How To Start An LLC - FAQ
There are a few key steps you'll need to take when starting an LLC. Here's a quick overview:
The above guide provides an overview of the critical steps you need to take when starting an LLC.
While forming an LLC can be complex, the great news is that most of the steps are one-time events.
Once you've completed the formation process, you'll be ready to start and run a successful business.Do you want to uncover the right ideas to ensure your LLC business has the best chance of success? Check out The Lazy Man's Guide To Living The Good Life, a book that can help you find the perfect business idea to run with based on your interests and skills.