I’ll never forget the day I was staring at piles of paperwork dumped onto my kitchen table five years ago, panicking that I might send in the wrong form or erroneously check the wrong box and lose my entire life savings through a lawsuit against my new company. There was no one to help me open a business. I was on my own with only my laptop.
What I learned was that filing paperwork can be easy, however, lots of research goes into properly doing so.
The Issue
The Problem: Finding the right path to register your company when becoming a new business owner is usually difficult for most people. People often worry that they will make an expensive mistake that will result in losing their entire investment.
Situation Constraints
The Constraints: Many new business owners do not have much time or resources; therefore, they want to make sure they get the proper legal structure for their new business but at the same time, have the support of an attorney with respect to what they need to do legally.
The Solution
The Solution: This document gives you the information necessary to register your Limited Liability Company (LLC) based on just minimal information so you can legally create an LLC for your business.
Prerequisites and Context
Before you can actually start the registration process, you will need the following items and a solid business plan:
- Your company name needs to be available in the state you will be registering as an LLC.
- An active email and phone number.
- A debit or credit card for filing fees.
- An individual (or resource) who is familiar with the dot-gov websites of your respective state who can help answer questions regarding the registration process.
- A geographic area where you want to operate your business (it may be your home).
Understanding the LLC Structure: Why It Matters for Your Business
LLC vs Sole Proprietorship: Assessing Liability Protection
An LLC is created by default when you start a business unless you file with the state. A sole proprietorship does not provide an owner with any liability protection which means if someone sues your business they could potentially take your assets including your home/car/personal bank account. An LLC provides a protective wall between the owner’s assets and the business. This is the most typical way an LLC protects an owner’s assets from owners of the business.
The Financial Implications: Exploring LLC Tax Benefits
The biggest benefit of forming an LLC is the tax deductions of the business. An LLC is considered by the IRS to be a “pass-through” entity, which means the owner(s) report the business income on the owner(s) personal tax return. However, when the business grows, it is possible to elect to have the company taxed as an S-Corporation. Electing to be an S-Corporation can save you thousands of dollars in self-employment taxes.
Sole Proprietorship to LLC comparisons
Liability: Personal assets are at risk for a sole proprietorship and are protected by the LLC.
Tax Filing: Sole proprietorships file a Schedule C (from their personal tax return) whereas an LLC has to file a Form 1120-S plus the members are taxed through the payment of W-2 wages.
Self-Employment Tax: Sole proprietorships pay self-employment taxes on their full net income whereas with an LLC (assuming S-Corporation election is made), the members of the LLC only pay self-employment taxes on their W-2 wages.
What Didn’t Work For Me
I did not do things the right way when I first started my business. I was attempting to save money and utilized a FREE, generic operating agreement template I found on the Internet (from a public forum). I learned the hard way that there are some things you cannot skimp on when organizing your business. When I went to open a business banking account, the bank would not open the account using my operating agreement without additional language regarding the voting rights of the members. In addition to the cost of the business account (per the bank), I had to hire a professional to rewrite my operating agreement because I used a generic template and now need one with the proper voting rights language. Hence: don’t cut corners when preparing the foundational documents for your business. Check official state resources to confirm you comply with all local laws and regulations.
How to Register an LLC for a Small Business
Selecting and Registering a Business Name
You will need to select a business name that is unique to your state. To check the name availability, consult your Secretary of State Business Registry. Once you are satisfied with a name, make sure to add an LLC (Limited Liability Company) at the end of your company name.
Appointing a Registered Agent Requirements
Each state requires that you comply with the Registered Agent requirement. A Registered Agent is an individual or service that agrees to accept legal documents on behalf of you and your business. You can act as your own Registered Agent; however, you must be available at your Registered Agent Street Address during regular business hours. If you prefer to maintain your privacy, most people use a Registered Agent service to maintain their home address from public record.
Filing Articles of Organization and State Filing Fees
Your Articles of Incorporation are used to document the birth of your new company. Your Articles of Incorporation must be submitted to your state and you will need to pay a state filing fee, which can vary from $50 to $500 or more, depending on your state.
Sample Articles of Incorporation Form Fields:
- Name of your LLC: (Your Business Name) LLC
- Registered Agent Name: (Registered Agent Name)
- Registered Agent Address: (Physical Street Address)
- Management Structure: Member Managed vs. Manager ManagedManager-Managed
Post-Formation Essentials: Securing Your Business Identity
Obtaining Your EIN Application
An EIN (Employer Identification Number) is similar to a Social Security Number for your business. It is required to obtain bank accounts and hire employees. The EIN can be obtained for free through the IRS website.
Drafting an Operating Agreement for Internal Governance
When you are a sole founder, you need to have an Operating Agreement. This document establishes that you are a real business entity and need to include the following:
- Ownership percentage
- Decision making process
- What happens if a member departs or dies
- How to dissolve your business
Navigating the Edge Cases: What Happens When You Move or Expand?
Managing Multi-State Registration and Foreign Qualification
If you open your business in Delaware and later move to Texas, or you start working in a new state selling products, you may need to register your business as a “foreign entity”, otherwise known as foreign qualification. Essentially, by registering your business as a foreign entity, you are saying to the new state: “I am currently an LLC and am also going to be doing business in this state.”
Compliance and Maintenance: Keeping Your LLC in Good Standing
Understanding Annual Reports and Franchise Taxes
Most states require an annual report so that your information is up to date and accurate. States like California also charge a franchise tax for operating an LLC. Not filing your annual report can lead to administrative dissolution of your company.
Maintaining Corporate Veil Integrity Through Financial Separation
The most important part of corporate veil integrity is to never intermingle funds. If you buy groceries from your business bank account, you will pierce the corporate veil; as such, a judge will rule your LLC is not an established company and you will be responsible for business debt personally.
Checklist for Keeping Your Funds Separate:
- Open a separate checking account for your business
- Get a business credit card for all business purchases
- Do not pay for personal expenses from your business account
- Keep your receipts stored in a digital folder for safekeeping
Frequently Asked Questions
Can I form an LLC if I do not have a physical office in the state where I am located?
Generally, no. You must have a physical address for your registered agent; however, you can hire a commercial registered agent to be your registered agent for the business.
What is the length of time to complete the process to form an LLC?
The amount of time it takes to form an LLC varies in each state from 24 hours (expedited filing) to 2-4 weeks.
Do I need a lawyer to fill out my LLC formation documents?
Not necessarily. If your business structure is simple, you should be able to complete it yourself online through your state portal. If you have multiple owners or have complex IP issues, you should definitely consult with an attorney.
