July 9th, 2018 | By: The Startups Team | Tags: Strategy
LLC means “limited liability corporation,” which is a type of business structure that creates a legal entity for the business that is separate from the business owner(s), meaning that the owner(s) are usually not personally liable for the company’s debts or lawsuits. Other common business entity structures such as corporation, general partnership, or sole proprietorship do not offer the same protections.
LLCs, which can be owned by one person (a single-member LLC) or more than one person (a multiple-member LLC), are essentially hybrid entities that combine the asset protection of a corporation with the flow-through taxation benefits of a partnership or sole proprietorship.
LLCs are a popular business entity type for new and small business – and startups in particular – due to the fact that they tend to be simpler and more flexible than a corporation, while offering similar protections, not to mention easy to start.
If you choose to form an LLC, your business will become it own legal entity that has separate debts and legal matters from you as an individual. However, LLCs are still tied to your personal (individual) taxes.
Step-by-step, here is how to create an LLC:
Most business owners will simply form the LLC in their state, but if you plan to do businesses in multiple states you may want to consider state-by-state requirements and taxes before choosing to file paperwork with the state.
Requirements vary state-to-state, and you can’t register a name that is the same as that of another business entity registered in the state. Additionally, many states restrict to use of words like “bank” at the end of a name, and you must use the designation LLC at the end of your business name.
When setting out to form an LLC, you must choose a “registred agent,” sometimes called a statutory agent. This is the person who will receive any official document (including lawsuits) on behalf of the LLC.
State-by-state requirements vary, but the person must be 18 years of age or a business entity that provides registered agent services. Many LLC’s designate a member or an employee to act as their registered agent.
The LLC operating agreement will describe how you will run the LLC, and contains key information regarding how the business will be managed, rights and responsibilities of LLC members, will describe how profits and losses will be divided, and will also go into other key procedures for the LLC such as how the departure of members should be handled.
You’ll need to decide who will run the business (managers or members) and how many owners will be part of the LLC.
The Articles of Incorporation (also called “Articles of Organization”) is the legal document that you must file with your state to establish your LLC.
Most states will require the name of your LLC, the duration (if not perpetual), the purpose, the name/address of the registered agent, and whether or not the LLC will be managed by it’s members, managers, etc.
You must submit your Articles of Incorporation along with your filing fee to the state – either in person, via mail, or online (if available). It may take a few weeks to process depending on the state, but you should receive a formal certificate stating that your LLC has been formed once the process has been completed.
As a note, a few states have an additional requirement that you must publish a small newspaper notice of your intent to form an LLC (usually must be published several times over a period of weeks)
Additionally, you must then submit an affidavit to the state business filing agency.
There may be fees associated with this notice that have to be paid to the newspaper or to the state government.
It’s important that you check with your Secretary of State for the requirements in your state.
Additionally, you should now be free to set up your business bank account.
Depending on your business, you may also be required to register your LLC with state and local taxing, licensing and permitting authorities. If you are doing business in multiple states, you will also need to register your LLC to do business in those states.
Requirements vary from one jurisdiction to another, but generally your business most likely will be required to pay unemployment, disability, and other payroll taxes – you will need tax ID numbers for those accounts in addition to your EIN.
Here is a link to a great state-by-state resource for getting started with LLC’s.
An LLC is a great way to create a barrier between your personal assets and your startup’s financial liability. It combines elements of a partnership, sole proprietorship and a corporation.
Whereas in a sole proprietorship, the owner and the business are viewed as one and the same, an LLC creates a business separate from the owner. What this means is that if the business files for bankruptcy, the members do not have to use personal money to pay the company’s debts, and if the business faces a lawsuit, the members do not risk losing their home (or other assets) to cover a settlement.
The LLC business structure combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation, creating the best of both worlds for startups founders.
Simply put, forming your business as an LLC helps to protect you against lawsuits, significantly cuts down on paperwork compared to other business types (no annual meetings or minutes records are required), prevents your business from being taxed twice, and enhances your startup’s credibility.
All LLCs offer the same features that make them a unique hybrid of other business entities – limited liability and pass-through taxation. However, some LLC types work better or worse for particular business scenarios.
Limited liability is one of the main advantages of an LLC over a sole proprietorship, along with not being taxed as a self-employed person, unlike with a sole proprietorship.
On the other hand, sole proprietorships generally are less costly compared to an LLC, and LLCs need to register with the state and pay initial registration or filing fees, often have annual fees which must be paid to maintain your registration, are subject to state laws governing LLCs, and require members to keep both LLC records and funds separate from their own personal records and funds.
Both LLCs and S corps benefit from limited liability protection, being separate entities, pass-through taxation, and being subject to going state compliance requirements.
However, as compared to LLCs, S corps have stricter rules about ownership, have more mandatory requirements and internal formalities; have directors and officers and shareholders do not manage daily business affairs; has freely transferable stock; and shareholders must receive their profits and losses based on their percentage of ownership.
Unlike both LLCs and S corps, C corps are taxed as separate entities and are also subject to “double taxation” if corporate profits are distributed to owners (shareholders) in the form of dividends.
C corporations pay tax on their profits first at the entity level and then owners pay taxes at the individual level on profits received as dividends, resulting in the double tax. C corps can also retain and accumulate earnings (within reasonable limits) from year to year.
Like LLCs, C corps don’t have restrictions on the number of owners the business can have or who can be an owner.
Limited Liability Partnership, or LLPs, have the same tax advantages of LLCs, but cannot have corporations as owners.
Additionally, unlike LLCs, LLPs must have at least one managing partner who bears liability for the partnership’s actions.
LLCs and Ltds are most similar, with only a few minor differences, with the primary one being that Ltds are subject to double-taxation.
Yes. An S-corp may own up to 100 percent of an LLC. The similarity of tax treatment for S corps and LLCs eliminates most of the common concerns about IRS issues.
No. While an S corp is a “pass-through” tax entity, like the LLC, C-corps are taxed as separate entities. They are also subject to “double taxation” if corporate profits are distributed to owners (shareholders) in the form of dividends.