Creating an LLC may be the best option for your small or medium business. Here’s how to form one.
Key Takeaways
-
LLCs are the preferred entity structure for small to medium businesses
-
LLCs are easy to form and maintain
-
The basic steps to forming an LLC
If you are a one-person business or have business partners, you will want an entity structure that’s easy to form and maintain, flexible, protects personal assets, and maximizes tax advantages. Many experts agree that the Limited Liability Company (LLC) should be your entity of choice.
The LLC offers the best of both worlds for small to medium businesses. It provides the benefits of both the corporation and the partnership without their shortcomings.
Becoming an LLC
While the laws regulating businesses vary by state, there are many common steps, and you must also adhere to federal tax requirements. Here are the basic steps. Be sure to check with the Secretary of State in your home state and wherever you plan to conduct business.
1. Select a name
You will need a unique name for your LLC that complies with your state’s naming rules. Your company’s name cannot be deceptively close to another company’s name.
2. Choose your LLC’s home state
The obvious choice is to name your home state based on where you will be conducting most of your business. However, there are other legal and tax considerations. You’ll want expert advice to guide you, as this decision will have lasting effects.
3. File organizing documents and pay appropriate fees
Based on the requirements of your primary state, you will be required to file an official document, usually called Articles of Organization, with the office of the Secretary of State or your state’s corporate filing office. It is typically a short form covering basic company details and is often available on your state’s website.
This step is important because it officially establishes your company’s business structure. States charge a fee ranging from $50 to $500 to file and receive certified copies of the documents.
In some states, it is also necessary to publish a notice of intent to create an LLC. Again, this varies by location but usually requires taking out a legal notice in a local newspaper announcing your intent to form an LLC. Your state may also require filing an affidavit of publication.
You must also register your LLC wherever it will be doing business, according to each state’s requirements.
4. Apply for an Employer Identification Number (EIN)
After your LLC is approved, you must file Form SS-4 with the Internal Revenue Service (IRS). This form can be obtained from and filed on the IRS website free of charge.
5. Choose a registered agent
To conduct business in most states, your LLC must appoint a Registered Agent (RA). An RA is a business or individual designated to receive legal documents on behalf of the LLC. The RA provides a physical street address in the state where the LLC intends to form if it does not have an actual presence in that state.
6. Determine your management structure and create an operating agreement
Even if your state does not require you to show proof of an operating agreement, legal experts strongly recommend that you draft one before starting business operations. All LLC members should agree on a structure and plan for managing the business and sign the final written version.
The operating plan is the resulting internal document of guidelines governing the LLC’s ownership structure, procedures, and member rights and responsibilities, and additional details. With no operating agreement in place, your LLC will be by default run according to the Laws of your state.
7. Take the proper steps to ensure compliance
Based on your company’s location, its business nature, and other factors, you may need to make additional filings and/or pay fees to local, state, and federal authorities. For example, certain businesses require operating licenses or certifications.
If you will be selling goods and collecting sales tax or will pay employees, you may also have to register with the appropriate taxing authority in each state you are conducting business.
After the initial filings, some states require annual report filings and fees, and proof that all licenses and certifications are up-to-date. These compliance measures also vary greatly and are dependent upon your LLC’s location and industry.
Additional considerations
These guidelines for registering as an LLC assume that the company you are forming will be actively doing business and not be used only to hold assets. For those businesses, different rules apply.
Also, an LLC may not be the right choice if you expect to take your company public or hope to be acquired by a public company anytime soon. If either of those actions are looming, it is better to choose the corporation’s legal structure.
The best decision for your situation
How you choose to structure your business entity is not one to be taken lightly. Whether you are changing your existing status or starting a new venture, you should have qualified legal and financial advisors guiding your way.
At Franco Blueprint, we offer guidance for small or medium-sized businesses during startup. We assist with managing a company’s accounting needs as it grows. For existing businesses, we can provide an honest assessment of the existing business structure and help facilitate a change, if advisable.
It is our business to assist small-business owners and help them secure their livelihoods during times of crisis and beyond. Contact us for a free consultation today.