Before you start a company, you need to decide which entity you will use. Each entity has different tax obligations and, depending on your company size and structure, those tax methods could be beneficial or a hindrance. Additionally, different entities offer different levels of protection from lawsuits. A limited liability company (LLC) offers the best of both worlds in that it is not double-taxed like a corporation yet offers more protection from lawsuits than a sole proprietorship. If you are not sure which entity is best for your situation, speak to a tax professional to learn more about how the various entities are taxed.
Each state has its own rules for forming an LLC. Before you can see if your preferred name is available, you need to know which state you will file in. 'XYZ Widgets' might be available in your state, but it may not be available in the state you choose to form the LLC in. You may want to consider the following factors when choosing in which state to form an LLC:
You may choose a different state to form the LLC in because it may seem to be cheaper, but watch out for alternate fees. Of course, some states have other benefits. Some states, such as Delaware, are more attractive to investors because of the benefits. For example, large investors prefer forming an LLC in Delaware because the state has a separate court that deals with business disputes. A judge, instead of a jury, decides cases, and those cases are often completed much faster than business disputes that go to court in other states. This advantage is only for larger companies that might have complex business litigation issues.
Even though the costs may be higher than in some other states, forming an LLC in your own state has its benefits.
If you have a small company, it is usually better to file in your own state for financial reasons.
When you choose a business name, you need to ensure that the name is not being used by another business. If your state’s Secretary of State is online, you may be able to search the database to see if someone else is already using that business name.
If you choose to form an LLC in another state, you must check the other state’s database to see if the name is available. Generally, some form of 'Limited Liability Company' must be in the company’s name, whether it is 'Limited Liability Company,' 'LLC,' 'L.L.C.' or another acceptable form.
LegalNature can form your LLC for you. All you need to do is complete a short questionnaire and LegalNature will use your responses to complete the articles of organization and other documents that are required for setting up the limited liability company. The following information is needed from you:
Depending on the complexity of the operating agreement, it may require more information about contributions, salaries, allocations, distributions, management information including information about annual meetings, adding and removing members, transfers, dissolution of the LLC, and mediation/arbitration and modification clauses.
The LLC operating agreement dictates how the company is managed and includes voting rights, management, dissolution of the company, and more. This document keeps the members and/or managing members from fighting amongst themselves should one or more member not agree with the decision of another.
This document also outlines salaries, allocations, and distributions. This section dictates what a person’s salary is, when he or she gets a raise, what any bonuses may be, and how much profit each member will receive if the company decides to distribute excess profit.
An LLC may have members, managing members, or a combination of both. In member-managed LLCs, all members run the business. Some members may have more responsibility than others, and this usually depends on what percentage of capital or services they gave at start up.
A manager-managed setup is usually used for a larger business where you would not want to share company management with all of the members. The other reason why a person would set up a manager-managed LLC is when some of the members do not have the skills to manage a company. Then, only the managing members actually run the company.
The manager-managed setup is also used when some members choose to remain silent. Often, these are investors who have invested in your company that do not want and/or need to be part of the management.
The operating agreement outlines the duties of each type of member. In addition to that, the operating agreement may state the percentage of distributions from the company. For example, if you and five others start an LLC together but you put in 51 percent, a second member puts in 30 percent, and the other three put in a combined total of 19 percent, the distributions should follow the same percentage. Distributions are the profits at the end of a specified term, which could be monthly, quarterly, or yearly.
If you have a manager-managed LLC, only the managing members would receive distributions. If you have a member-managed LLC, then all of the members would share in the distributions.
Members’ voting rights usually follow the percentage they put into the company. For example, a member who put in more than 50 percent may have two votes if that is how you decide to structure the company. The rest have one vote. You may structure the voting rights as you please. You may also decide whether you need a majority or super majority for the company to execute any major transaction such as a loan or the purchase of additional property.
The operating agreement also provides for dissolution of the company whether the company is administratively dissolved by the state or the members and/or managers decide to dissolve the company. This section of the operating agreement also provides regulations dictating how a member may withdraw from the company and that member’s rights.
Forming a business is more than creating a limited liability company. Almost all businesses must have an employer identification number (EIN) and a registered agent at a minimum. Licenses and permits may also be requirements, depending on the type of business you are starting and the location.
Even if you are the only employee, it is a good idea to get an employer identification number. In many cases, you will be able to use this number for transactions instead of your social security number. LegalNature may apply for the EIN for you as part of our services. We will require the following information to get you an EIN:
You must also tell the IRS if you are providing certain products or services, if the business owns a vehicle that weighs 55,000 pounds or more, whether the business involves gambling, if you sell tobacco and/or firearms, if you sell or manufacture alcohol, if you have to pay federal excise taxes, and whether you have applied for an EIN before.
You also have a choice of paying annual instead of quarterly taxes if you do not expect to pay more than $4,000 in wages. You will also need to provide the date the business was acquired and provide the accounting year (fiscal or annual).
All limited liability companies need a registered agent. The agent accepts official mail for the business, including, but not limited to, mail from the Secretary of State and lawsuits. The registered agent must be someone who is always available during regular business hours and must live in or have an office in the state where the company is registered. While some people do act as their own registered agent, it is always a good idea to have a company that provides this service so that you are sure to not miss any important deadlines.
Before you set up an LLC, you should know how you are going to handle payroll, especially if you have more than yourself as a member or managing member and you have employees. Part of the operating agreement discusses the terms by which your members and managing members will be paid. This may include weekly salaries, bonuses, and even stock options. For regular payroll purposes, you may want to consider retaining a firm to print payroll checks for you. The firm will handle the taxes, and, when it comes to tax time, will issue W-2s, 1099-Miscs, and other tax documents.
When you create your limited liability company with LegalNature, you will receive the articles of organization, EIN (if requested), and the organizer resignation which we file so we are not considered part of your company.
Setting up a business entails many details and the contracts and agreements to handle those details. To avoid legal issues with managing members and members, you should have a detailed operating agreement, an EIN, a registered agent, and the proper documents for your website. Visit LegalNature to learn more about setting up a limited liability company in the state of your choice using our services, and any other documents you may need to set up your new LLC.