Forming An LLC

Author 07.17.15
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A lot of attention has been given to LLCs lately. An LLC, short for limited liability company, is a middle ground between a partnership and a corporation. Forming an LLC grants business owners full limited-liability protection like that of a corporation with a pass-through tax status like a partnership. LLCs are relatively new, and can be thought of somewhat as regular partnerships, but all the partners involved aren't personally responsible for any debts of the company. With all the benefits that an LLC affords owners, it's no wonder that they are becoming more popular. Forming an LLC can be done in a few manageable steps.

The Benefits of Forming an LLC

Before starting a limited liability company, it's useful to understand all the amazing benefits it can provide you with. LLCs are one of the most flexible business entities, and allow owners to decide who manages the daily affairs of the business, how the profits are distributed, and how the profits are to be taxed.
One of the biggest advantages of an LLC is the liability protection afforded by the members of the company. If any creditor comes knocking on your door, or a lawsuit is filed against your business, you can't be affected personally. No matter what happens in the business, your personal assets are kept safe. A limited liability company is really one of the only business entities out there that prevents creditors and potential lawsuits from taking your company to court and liquidating your personal assets.

There can be as many partners as you want in a limited liability company, without any ownership restrictions. Other entities can also become owners of the LLC. Not only that, but owners can manage, and managers can own - the choice is essentially yours. The tax benefits of LLCs are also a big reason why many people choose this entity over a partnership or corporation. You are able to select from all sorts of ways to be taxed, depending on what suits you and your company best. There is no need for a separate tax return; instead, your company's profits and losses are reported when you file your personal tax return. Unlike other types of business structures, a limited liability company can have a pass-through taxation, which means that your business' profits will not be taxed at the company level, but rather at the individual level, which means no double taxation involved.

The flexibility if profit distribution is another big advantage for business owners who open an LLC. As an owner, you have the capability of deciding what percentage of the profits to give to whom, regardless of how much a partner actually owns of the company.

Forming an LLC in Your State

To start the process of forming your own limited liability company, you'll need to get in touch with the LLC office in your particular state. Limited liability company and corporation divisions are typically part of of the Secretary of State office. This center provides a citation to each state's laws that govern LLCs. Citations are essentially the title, chapter and section of a law that is used to find the specific law within the larger state.

Decide the state in which you'll form your LLC. While many business owners choose to open their LLC in their home state, many others decide to form an LLC in another state. If you're forming an LLC in your home state, you should file for incorporation there, since many laws in various states require LLCs to be registered in the state in which business will be transacted. If you're opening an LLC in another state, it will need to be opened there. If your company is internet-based with no actual physical location, look into the tax benefits of incorporating in another state other than yours to see if the incentives are better elsewhere.

Select a name for your company, and make sure that it complies with the laws in your state that governs the naming of LLCs. The name should be original, distinctive, memorable, be easily pronounced, and identify the products or services offered. Of course, you'll need to check to see if the name you choose is actually available before you register it. Under no circumstances should the name violate any trademark from another company, or else that other company can sue your business. You'll need to choose a registered agent, which is a person that accepts legal service in case your company becomes involved in a lawsuit at some point. You can use an attorney, hire a service agent, or name yourself as the registered agent. Once you've named your registered agent, file your articles of organization and necessary fees with the LLC office in your state. This involves filling out a simple form that is provided by your LLC filing office.

Create an LLC operating agreement, which is essentially a contract between the owners of the LLC and outlines topics including the responsibilities of the members, how the profits will be distributed, voting powers, rules for holding meetings, and other general information regarding the agreement between the members of the LLC. You will need to obtain an Employer Identification Number (EIN), unless your LLC only has one owner and you have intentions of filing taxes as a disregarded entity. You can obtain this number by filling out an online application, after which you'll immediately be given an EIN. Any additional permits and licenses will need to be obtained, including a zoning permit, export license, liquor license, and any other necessary permit or license to conduct your business legally.

Since LLCs are not recognized by the IRS for income tax purposes, it's necessary that all LLCs to select how to be taxed, whether as a partnership, corporation, or to be disregarded as a separate entity. IRS Form 8832 will have to be filled out for tax purposes. The entire process of forming an LLC is rather quick, and requires very little paperwork. Within weeks, your LLC can be up and running and open for business!

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