A limited liability company, commonly referred to as an LLC, is a business structure that provides personal liability protection and flexible management and taxation options to its owners. What’s great about this business structure is anyone can form it. Whether you are a United States citizen or a foreign entity or individual, you can start an LLC in any state in the U.S.
Step by Step Guide to Forming an LLC
The process of forming an LLC isn’t complicated. It does, however, require you to follow certain essential steps and meet specific requirements. This post will go over the steps to form an LLC in the United States. We will cover the types and characteristics of an LLC as we narrow the topic to the process of starting this business structure.
Characteristics of an LLC
An LLC is, to some degree, a cross-breed of a corporation and a partnership. This business structure combines the tax advantages in a partnership with the liability protection that comes with a corporation. Here are the common characteristics that you’ll find in an LLC:
Separate Legal Entity
An LLC is a separate legal entity from its owners, also called members. This business structure can continue to operate and exist after the death or withdrawal of its members.
An LLC can buy, own and sell assets on its own. It can bring lawsuits, hire attorneys under its name and enter into a binding agreement or contract in its own right.
Limited Liability Protection
The one characteristic that makes an LLC popular is it offers limited liability protection to its members. The owners of an LLC cannot be held liable for the LCC’s debts and liabilities. No lender or creditor can claim the member’s assets to pay a loan defaulted by the LLC.
This business structure can be formed by an individual, another LLC, trust, partnership entity, even a corporation. The state has no limit to the number of owners in an LLC. And as mentioned above, you don’t need to be a United States citizen to form an LLC. You also don’t need a U.S Visa if you plan to be a passive member or investor in your LLC. If, however, you would want to run operations while in the United States, you will need a Visa.
Flexible Management and Operations
An LLC is more flexible to run and manage than a corporation. You are not required to appoint a board of directors and hold annual meetings. The documentation and record-keeping process also aren’t as burdensome as a corporation. The members of the LLC are free to decide who will run the day-to-day tasks and how everything will operate.
Choice of Taxation
Although considered a separate legal entity, the IRS allows LLCs to choose the taxation option they want. They can tax this business structure at the individual level like a partnership, or the corporate level, like a corporation.
If taxed at the individual level, the profits or income generated by the LLC are passed to the members. The members then report the income on their personal tax returns. This taxation method is known as pass-through taxation.
Types of LLCs
LLCs fall into different types and categories depending on ownership and the management and operations structure.
Here are the different classes of an LLC:
Single-Member LLC Versus Multi-Member LLC
As the name suggests, single-member LLCs are LLCs owned by one person. They are easier to form and don’t require a lot of paperwork. A multi-member LLC, by contrast, has more than one owner.
Member-Managed LLC Versus Manager-Managed LLC
A member-managed LLC is one where the members own and manage the daily duties of the LLC. The owners are actively involved in the day-to-day operations of the LLC.
A manager-managed LLC is one where the owners don’t run the daily duties in the business. They simply own the LLC and profit from it. In this LLC, members hire outside managers to run the daily tasks.
Holding LLCs Versus Operating LLCs
A holding LLC is an LLC that does not manufacture, sell products or conduct any operations. This LLC structure exists to hold assets such as real estate or act as a parent company for other subsidiary LLCs. The reason for forming a holding LLC is to add extra protection from personal liability.
An operating LLC, by contrast, exists to conduct business operations such as manufacturing, buying, and selling products and services. This LLC structure can fall under the umbrella of a holding LLC. It can also lease assets from the holding LLC to use in operations. This way, if the operating LLC defaults payments, the lender or creditor cannot claim assets of the holding LLC. They can only claim those of the operating LLC.
Domestic LLC Versus Foreign LLC
A domestic LLC is one registered in and operating in the state of registration. For example, assume you register your LLC in New York and conduct your operations in this same state. In this case, you have a domestic LLC.
A foreign LLC is an LLC operating in one state but registered in another. For example, assume you register your LLC in Nevada for tax advantages but conduct business in Chicago. The state of Chicago will consider your entity a foreign LLC.
A PLLC, also called a professional limited liability company, is an LLC that has a license to offer professional services. This LLC structure is different from a regular LLC in that it holds a license to offer services such as legal and medical.
A series LLC is an LLC that contains a master or parent LLC and individual child LLCs under it. This LLC structure offers liability protection to each individual LLC in the series.
For example, assume one of the individual LLCs defaults on a bank loan. The bank can only claim the assets of that particular LLC. It cannot claim those of the other individual LLCs in the series.
Costs Associated With Forming an LLC
The cost of forming an LLC is higher than that of a sole proprietorship and partnership. It may, however, vary depending on whether you register the LLC yourself or hire a business registration service to assist you. The fees payable may also differ from state to state.
Here are the fees you may be subject to paying when forming your LLC. For some, you’ll pay when registering your entity. For others, you’ll pay on an ongoing basis.
To register your LLC, you need to file articles of organization with the secretary of state in your state. The filing fees range from $50 to $100, depending on the state where you register. However, in Alaska, you’ll pay $250.
Name Reservation Fee
The initial step to take when forming an LLC is selecting a business name. Most states allow you to reserve the business name by filing a name reserve application. The fee payable ranges between $10 and $50. Name reservation is, however, optional.
DBA Registration Fee
You may need to file for a DBA if you use a fictitious name (a name that’s not the one registered with the state) to run your LLC operations. The average cost for DBA registration is $50 to $100.
Business License Fee
Depending on your location, you may need to acquire a local business license from the county or city government. The fee payable ranges from $50 to $100.
You may also need to renew your LLC’s local business license annually. The renewal fees usually range between $20 and $100.
LLC Annual Report Fees
Most states require you to file your annual report with your secretary of state to update any information or changes in your LLC.
This annual report is also called the statement of information or the periodic report. It allows your secretary of state to stay updated on information about your LLC. The fees payable may be anywhere between $0 and $500.
Registered Agent Fees
States require you to appoint a registered agent when forming an LLC, or any business entity for that matter. You may have to pay registered agent fees if you choose to hire a registered agent service company rather than appoint yourself or someone in your team. Most companies may charge you $100 to $300, payable per year.
Annual LLC Taxes
Some states require you to pay a minimum annual LLC tax regardless of the income your LLC makes. The annual LLC tax ranges from $100 to $800, depending on the state.
How to Form an LLC
As highlighted in the introduction, there are some steps to follow to form an LLC successfully. Let’s go over them one by one:
1. Choose a State
Although you can register your LLC in any state, it’s advisable to form it in the state where you plan to conduct business. This way, you can choose yourself as the registered agent if you live in that state. You’ll also have an easier time visiting your secretary of state’s office if there is an issue with registration.
If you choose to form your LLC in a state where you don’t operate, you’ll have to file for a foreign qualification in your state of operations. Selecting a different state only makes sense if your business is online or you run operations in more than one state.
2. Do a Name Search
To form your LLC, you need to select a name that’s not already in use in another LLC or entity in your state. A good tip would be to conduct a name search on your state’s secretary of state website. You can also check if the name is taken online on social media or search engines like Google.
If you find a unique and memorable name but are not ready to register your LLC yet, you can reserve the name for a short period. The name reservation fee, as mentioned above, ranges from $10 to $50.
3. Nominate Your Registered Agent
You can’t register an LLC without choosing a registered agent. This person is responsible for receiving official documents from the state on your LLC’s behalf.
The registered agent can be you or a member or employee in your LLC. You can also hire a registered agent service company for a small annual fee. The person you nominate should have a physical address in the state where you register your LLC.
4. File Articles of Organization
To officially register your LLC, you need to file articles of organization with your state’s secretary of state. The details to provide in this document include:
- Your LLC’s name
- Your LLC’s physical address
- Your LLC’s purpose
- Your registered agent’s name and address
- Type of LLC (member-managed or manager-managed)
Once successfully filed, the state will issue you a confirmation letter or certificate. This certificate will serve as proof of your LLC’s existence. You can use it to get an EIN and open an LLC bank account.
5. Create an Operating Agreement
Most states require you to draft an operating agreement when forming your LLC. Some may allow you to have an oral agreement. But in most cases, it’s better to work with a written one. You need to create this document even though you are the only member of your LLC.
An operating agreement is a document that highlights the members in an LLC and outlines how the LLC will operate. This document should clearly describe the ownership structure, tasks and duties, profits and salaries, and the steps for holding meetings and handling disputes.
The operating agreement should also spell out every member’s roles and authorities and the process of transferring ownership and bringing in new members. It’s better to consult an attorney when creating this document.
6. Get an EIN
Once you form your LLC, your next task should be to obtain a federal EIN from the IRS. You need to get this nine-digit number if you have employees in your LLC. You can use your EIN for income tax reporting and opening a business bank account. The IRS gives EINs for free online once you apply on the IRS website.
An LLC offers limited liability protection and flexible management to its members. Any individual or entity can form this business structure. You can also start an LLC if you are a foreigner in the United States.
LLCs fall into different types and classes depending on the ownership structure and purpose of the entity. The costs associated with forming this business structure are filing fees, annual reporting fees, annual LLC taxes, and business license fees. You might also encounter additional fees such as DBA fees, name reservation fees, and registered agent fees.
To form an LLC, you first need to select the state where you want to register the LLC. Afterward, choose a business name that is not being used in another LLC or entity. Your next step after choosing a business name should be to nominate a registered agent and file articles of organization with your state’s secretary of state.
Once you form your LLC, you can create an operating agreement then obtain a federal EIN and a business bank account. There might be other steps to follow, although it depends on your state’s requirements.
Written By Melissa Rae