As an entrepreneur starting a small business, you'll have to determine which type of business you'd like to register as. Limited liability companies (LLCs) are popular options, as they allow a sole proprietor or partnership basic liability protection. If you're considering starting an LLC, here are some important steps to take.
What is an LLC?
LLCs are a type of legal business formation. They offer the owner or partners liability protection, so if the company has losses, debts or court rulings against the company, the owner’s personal assets are protected from those liabilities. An LLC can have an unlimited amount of owners, also known as members, and can be owned by another corporate entity.
For tax purposes, LLCs allow pass-through taxation. This is when the business's income and losses pass only through the business and are recorded on the owners’ personal tax returns. This allows the profits to be taxed at the owner's personal tax rate, helping them avoid double taxation.
8 steps to start an LLC
Here are eight steps to starting your limited liability company.
1. Select your state
Determine in which state you operate your LLC. Typically, this is the state where the owner or partners live; however, if you have a physical presence, or conduct a large percentage of your business in other states, you'll have to register an LLC in each state with that physical presence.
2. Name your LLC
Select a name for your business that you'll register as an LLC. Requirements vary by state, but a business's name cannot include words that would confuse it as a government agency, cannot be the same name as another LLC or business entity, and must include an LLC designator at the end of the name (e.g., MyDreamBridge LLC).
3. Choose a registered agent
A registered agent is the person who will send and receive legal documents for your LLC. This could be any type of legal summons or financial statements that they will then forward to you. Most states require LLCs to name a registered agent who is a resident of the state in which the business is operating.
Usually, you as the owner will act as the registered agent, but you can designate another member, an officer, or possibly your attorney or CPA. There are also registered agent services available for hire.
4. File with your state
When you register your LLC with your state, you'll need to provide full names and contact information for all members, the business’s name, the address, the length of time the company has existed, the registered agent, and the company's mission statement.
You will need to file your Articles of Organization with your state's corporate filing office which is typically the Secretary of State. A quick online search will let you know where to file. If you are using a service to set your LLC up for you, they will usually file with the appropriate State office on your behalf.
5. Determine your management structure
Owners of LLCs have the ability to choose how their company is managed, and members should choose the one that makes the most sense to their workflow in structure. You can choose to be managed by the members of the LLC or by outside managers. For simplicity’s sake, most LLCs are managed by their legal members (owners), but this could change as your LLC grows in size.
6. Create an LLC operating agreement
Outline the ownership structure for you and your members in order to have an operating agreement clearly stated on paper. If you don’t create an operating agreement, which is often not required, state law would dictate how it is operated.
7. Get an EIN
An EIN is like a Social Security number for your business. It allows the IRS to keep track of your business. It’s recommended to get an EIN even if you are technically not required to (such as Sole Proprietor or single-member LLCs). An EIN is required to set up payroll tax, for example, allowing you to hire employees. It’s also required to open a business bank account, which we also highly recommend to keep your business and personal finances separate.
While registering your LLC is done at the State level, filing for an EIN is done at the Federal level, through the IRS. It’s completely free and can be completed here.
8. File to do business in other states
While you will not want to register unnecessarily in additional states, as it will seem like a waste of time and money, there can be penalties associated with failing to register when you should.
Even if your business doesn't have a physical presence in another state, it's likely it will conduct business across state lines. Once your LLC is registered in your home state, consider registering in additional states where you have a physical presence (office, warehouse, etc), receive a large percentage of your companies revenue, pay employees, or have a bank account.
If you are unsure which additional states you should register with, you should consult an attorney. If you're an entrepreneur who's thinking about starting an LLC, check out the My Dream Bridge blog for other business startup resources.
For more information and resources for aspiring solopreneurs and small business owners, head on over to www.mydreambridge.com.