Form an LLC
Limited liability companies are a form of business entity in the United States that offers liability protection to its owners. This means that the owners (referred to as members) are not liable for the company’s debts or liabilities. Personal assets are completely shielded from creditors, affording them security. Limited liability companies are hybrid entities. They combine parts of both corporations, with partnerships and sole proprietorships.
Reasons to Form an LLC
Liability Protection
One of the main reasons people go about starting an LLC is liability protection. Especially if your business is a sole proprietorship or a partnership, the debts of your business are considered your personal debts as well. If your business partner or employee is accused of negligence, you may be at risk for your personal assets as well.
Similar to a corporation, LLCs are responsible for their own debts and obligations. This means even though the money you invested into the company may be at risk, your personal home, and bank account will not be available to collect on for business debts.
Flexible Tax Management
LLCs get to use both of the benefits from LLCs as well as corporations. Although LLCs do not have their own federal tax classification, they can choose to adopt the tax status of other entities. This means you can choose to be taxed as sole proprietorships, partnerships, S corporations, or C corporations.
The Internal Revenue Service automatically classifies LLCs as either partnerships or sole proprietorships, and this will be decided on whether there are one or more owners. Having said that, this also means that LLCs automatically obtain "pass-through" taxation. This is when an LLC does not pay taxes for the LLC, but rather those taxes pass through to the personal income tax returns of the owner, and the owners pay personal income tax on any profits. Corporations on the other hand may be taxed twice, once to the corporation, and another time to the actual owners. LLCs avoid this.
Privacy
If formed anonymously, an LLC allows you to have complete privacy. This means that your name will not be attached to your business. This is important in many sectors such as real estate, if you are a public person, or if you simply wish to keep your business transactions separate from your name.
Professional
When a business looks to obtain funding from a bank, most often it will not be possible without the formation of an LLC or corporation this will not be possible. Forming an LLC provides a professional appearance much more than that of a sole proprietorship or partnership. You appear as a true business, rather than simply someone doing business.
How to form an LLC
Choose a location
You can form an LLC in any state within the United States, but the most popular place to do so is in your home state. Other popular states to form in include Wyoming, New Mexico, Nevada, and Delaware. This is because of the tax laws afforded to LLC owners in these states.
Choose a name
When naming your LLC, you must comply with the state’s rules that you form in. These rules are different in every state, typically they all require the following:
- That your LLC's name end with either LLC, Limited Liability Company, or Limited Company,
- That the name is not the same as the name of another LLC or business in your state.
Typically for a fee, you can also reserve your name before filing your articles of organization. This can allow you to obtain the name you want and ensure no one reserves it before you do.
Choose a registered agent
Your registered agent is also called a statutory or resident agent. LLCs are required to have a registered agent. The registered agent acts on behalf of the company in order to accept legal papers or court documents (in the event the LLC is sued). This person or business must have a physical street address in the state where the LLC is registered. There are private companies (commercial registered agents) that will act as agents for the service of process for a fee. Otherwise, a member or employee may act as the registered agent.
Operating Agreement
Most states do not require an LLC to have an operating agreement, but it is always a good idea to have one. Your operating agreement is a document that establishes how your LLC will be run. This includes how it will be managed. If you do not have an operating agreement, and in the event of any legal issue, state law will govern how your LLC operates.
Articles of Organization/Formation
The Articles of Organization (or Articles of Formation in Delaware, Mississippi, New Hampshire, New Jersey, and Washington) must be filed with the Secretary of State or Division of Corporations in your state.
These can usually be completed online using the form on your Secretary of State's website. All you will need too in include is your LLC's name, the name and address of its registered agent, and other basic information, such as how you plan to manage it, and the names of other members. This is when you will pay a filing fee which will be around $100.
Who Should Start an LLC?
Forming an LLC is great for sole proprietors or partners who want to obtain liability protection. In general, though, anyone who has a hobby that consistently loses money is not considered to be a business.