Are you ready to start and form an LLC for your new business? We have provided the simple steps that you will need to take below in order to help you get your LLC set up online with ease.
Before you start a company, you need to decide on the entity structure. Each entity type is taxed differently. Depending on your company size and structure, those tax differences could be a benefit or a hindrance. Additionally, different entities offer different levels of protection from liability.
A limited liability company (LLC) offers the best of both worlds in that it does not face double taxation like a corporation, and it offers more liability protection than a sole proprietorship. One of the key benefits of an LLC is limited liability protection, which helps shield owners' personal assets from business debts and legal claims. By forming an LLC, you create a separate entity that is legally distinct from its owners, further enhancing this protection.
Read on to learn how to start and form an LLC online in just a few simple steps.
Table of Contents
1. Selecting the State Where Your LLC Will Be Formed
Each state has its own rules for forming an LLC. LLC laws and state law vary significantly, affecting formation requirements, fees, and ongoing compliance responsibilities. You should take the following factors into consideration when choosing the state in which you will form the LLC:
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State filing fees vary for each state. Currently, Massachusetts has the highest filing fee of $520. Several states, including Kentucky and Colorado, have filing fees that range between $40 and $50.
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Annual fees also vary. Fees may range from $0 (because a state does not require an annual report) up to over $500.
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Some states impose franchise taxes. A state may require this fee over and above the normal filing fees or may impose it in lieu of the normal filing fees.
Some states have other benefits. For example, forming an LLC in Delaware is more attractive to investors due to its long-established corporate legal system. Delaware has a separate court that deals exclusively with business disputes, where a judge decides cases instead of a jury, and those cases are often completed faster than business disputes that go to court in other states.
Forming an LLC in Your Home State
Even though the costs may be higher than in other states, forming an LLC in your home state has its benefits. For example, you do not have to pay extra fees for filing a foreign entity registration, which is required when registering your business as a foreign LLC in another state, and you may only need to maintain one registered agent.
2. Selecting Your Business Name
When you choose an LLC name, you need to ensure that the name is available and not being used by another business in that state. The majority of Secretary of State offices offer the ability to search an online database to ensure that the LLC name is not in use.
If you plan to operate under a different trade name than your LLC name, you may need to file a Fictitious Business Name Statement.
Generally, all states require an LLC’s name to include an entity designator. An entity designator identifies the company as an LLC and is usually some form of “Limited Liability Company.” Most states allow this to be abbreviated to “LLC” or “L.L.C.” Each state maintains a list of permitted entity designators, so it is important that only approved designators are used.
Some states also require you to submit a name reservation form along with a required filing fee to reserve your LLC name.
3. Completing a Questionnaire
LegalNature uses the responses in its questionnaire to complete the articles of organization and other documents that are required for setting up your limited liability company. Information that you need to provide depends upon the state of formation, but may include the following:
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Your full legal name.
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Your current residential address.
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The physical address for the business (principal place of business)—a PO Box is not sufficient; a real, physical address is required for legal and official documents.
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Your phone number.
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Whether you are using a fiscal year or calendar year.
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A list of the members and/or managing members.
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The registered agent’s name, physical address, and phone number, if not using LegalNature’s registered agent service (the registered agent must have a physical address in the state of formation).
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The activity of the business (e.g. retail, some type of service, etc.).
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The term, which is usually perpetual.
4. LLC Operating Agreement
An LLC operating agreement dictates how the company is managed and includes information on voting rights, management, dissolution of the company, and more. It is crucial to have a written operating agreement to clearly define the company's management structure, operational procedures, and to ensure all members understand their rights and obligations.
This document also outlines salaries, allocations, and distributions. The operating agreement should specify each member's ownership interests, which determine how profits are distributed and how voting rights are allocated among members. This section dictates what a member’s salary is, when he or she gets a raise, what bonuses may be, and, if the company decides to distribute excess profit, how much of that profit each member will receive.
Management
When you start an LLC, one of the first decisions is choosing the management structure. An LLC may have members, managing members, or a combination of both. In a member-managed LLC, all members actively participate in the daily operations and management of the business. Some members may have more responsibility than others, and this usually depends on what percentage of capital or services they contributed to the company when it was first set up.
A manager-managed structure is usually used for larger businesses where company management is not shared by all of the members. The other reason a company may use a manager-managed structure is when some of the members do not have the appropriate skills to manage a company. Then, only the managing members actually run the day-to-day operations of the company.
A manager-managed LLC is also used when some members choose to remain silent. Often, these are investors who have invested in your company that do not want 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 and you put in 51 percent, a second member puts in 30 percent, and the other three members put in a combined total of 19 percent, then the distributions may follow the same percentage structure. Distributions are the profits at the end of a specified term, which could be monthly, quarterly, or yearly.
One of the key advantages of an LLC is its flexible management structure, allowing owners to choose the management style—member-managed or manager-managed—that best fits their needs.
Voting Rights
Members’ voting rights usually follow the percentage of contributions they put into the company. For example, a member who owns more than 50 percent of the LLC may have two votes, if that is how you decide to structure the company. The other members may have one vote. You may structure the voting rights as you please, and 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.
Dissolution and Withdrawal
The operating agreement also provides for dissolution of the company, including 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.
5. Additional Requirements
Forming a business is more than just establishing the limited liability company. Almost all businesses must have a federal tax ID, known as 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. It is essential to obtain the necessary business licenses and permits for legal compliance, as you may need to obtain business licenses based on your business type and location. If your business sells taxable goods or services, you may also need to register for a sales tax ID. Choosing the right business form, such as an LLC, corporation, partnership, or sole proprietorship, is crucial for both legal and tax purposes.
Employer Identification Number
Even if you are the only employee, it is a good idea to get an employer identification number (EIN) from the Internal Revenue Service (IRS) for federal tax purposes, such as establishing a bank account. In many cases, you will be able to use this number for transactions instead of your social security number. The following information is required to obtain an EIN:
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The name of your LLC.
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Your “Doing Business As” name, if you use one.
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The number of members in the LLC.
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The name of the “Responsible Party” (the person who will be responsible for communicating with the IRS).
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The Responsible Party’s social security number.
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Your business’s physical business address (you cannot use a post office box address).
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Your business’s mailing address.
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The county your business is located in.
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The state your company was organized in.
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The primary activity of your business.
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The reason you are applying for an EIN. This may be because you started a new business, hired employees, created a trust, to comply with the IRS, your bank needs it for a pre-established company because you changed the type of organization, or you bought a business.
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 that the business was acquired and provide the accounting year (fiscal or annual).
After obtaining your EIN, it is important to open a business account or business bank account to keep your personal finances separate from your business finances. This separation helps protect your personal liability and simplifies tax filing. Consulting a tax professional is highly recommended to ensure compliance with federal tax regulations and to optimize your tax strategy. LLCs are subject to various federal and state tax obligations, including federal income tax and social security taxes, and owners may need to report business income on their personal tax returns for income tax purposes.
Registered Agent
All limited liability companies are required to maintain a registered agent (also known as a statutory agent in some states). The registered agent receives legal documents on behalf of the LLC, including, but not limited to, mail from the state's office (such as the Secretary of State) and service of process. A registered agent must be a person or business who maintains a publicly accessible address that is always available during regular business hours. The registered agent must be located in the state where your LLC is formed and is responsible for receiving official mail from the state's office. 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 you do not miss any important deadlines.
Website Services
Most businesses have a website to sell their products and/or services. If you do have a website, you will need a privacy policy and terms of use, often referred to as terms and conditions or TOC. These documents protect you and your customers. The privacy policy lets customers know how you will be handling their personal information, and the terms of use could contain anything from age restrictions to shipping policies.
Payroll
Before you set up an LLC, you should know how you are going to handle payroll. 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.
6. What Documents Will I Receive?
When you create your limited liability company, you will receive your articles of organization, EIN (if requested), and the organizer resignation that we file so we are not considered part of your company.
Conclusion
When setting up a business, you should make sure you understand all the rules and regulations and have the correct contracts and agreements in place. 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. Get started now by forming an LLC in the state of your choice.
