When setting up a business, you do not need to incorporate as a corporation if you do not want to have all of the formalities associated with a corporation. However, you are still able to benefit from most of the protections of a corporation if you choose to incorporate as a limited liability company (LLC). When you choose an LLC as your business entity, you have a lot of flexibility. Be it a single-member LLC or a multi-member LLC, in either case you have two options for management: member management and manager management.
Before you start a business, you should have researched all licenses and permits you need for the type of business you will be running. You should apply for these after you create your LLC so that you are sure the business name you choose is available.
You should also have a business plan. Even small, family-run companies should have a business plan. The plan outlines the day-to-day operations of the business, financing and marketing strategies, and more. If you need a loan to get your business up and running, the loan officer will give your application more consideration if you have a business plan.
A single-member LLC sounds just like what it is: there is only one owner, manager, and member. Choose any title you prefer and enjoy the freedom of little formalities for your business entity. A multi-member LLC has more than one member or manager.
If you have a single-member LLC, you also have another benefit: taxation. A single-member LLC is usually a disregarded entity. This means that you avoid the double taxation that corporations and multi-member LLCs are subject to. As a single-member LLC, your business taxes are filed on Schedule C of your personal tax return.
Once you choose whether you are going to be a single- or multi-member LLC, you then have to choose which management structure you prefer. The two forms are manager-managed and member-managed LLCs.
Some states also provide for the third type of structure: the director-managed LLC. Tennessee is one of those states. In a director-managed LLC, the board of directors has the power to make the decisions for the business. If the LLC has one director, that person shall make the decisions. If the LLC has several directors, then a majority is required to make any changes and/or decisions, including adding and removing directors. A director does not have to be a member of the LLC, thus you are able to have decision-makers who are not owners.
Certain decisions do require a unanimous vote by the members, including the following decisions:
While an operating agreement may not be necessary to set up an LLC, it is advisable to have one, even if you are a single-member LLC. If you do choose to eliminate the operating agreement, check the rules for your state before doing so. Some states may require an operating agreement.
The operating agreement lets everyone know the rules of running the business and could stave off arguments later on. For the single-member LLC, the operating agreement ensures that you have crossed all the Ts and dotted all the Is. It also provides evidence of separation of your personal and business affairs. In the event that you are sued and cannot prove that you kept your business and personal affairs separate, the person or company suing you could pierce the corporate veil and go after your personal assets. Thus, the operating agreement serves to prevent you or other members from becoming personally liable for company debts.
When you create an LLC, complete the forms from your Secretary of State. You will need the company name; the members' names, addresses, and contact information; the type of business that you will be conducting; and a registered agent.
Before you create a new LLC, check with the Secretary of State to ensure that the name you choose has not been taken already; you cannot have a name that is the same as another company's name. Register your name separately, if your state requires that. In many states, when you register the LLC, the state automatically registers your business name.
Be sure to have all members' legal names, addresses, phone numbers, and email addresses. If a member is another company, you will need the name of the company and the company's address and contact information.
You may also need the company's registration number from the Secretary of State and its Employer Identification Number (EIN) from the IRS, depending on your state's requirements.
The registered agent is a person or entity that is authorized to accept legal documents on behalf of the company. It could be yourself, another member, an attorney, or a financial institution, or you may use a company that provides registered agents. This is common for foreign—out of state—filings. Not only will this person receive any legal documents that may be served on the company, but he, she, or the entity will receive all communication from the Secretary of State regarding your filing.
Once you have completed the documentation, upload or mail it to the Secretary of State.
Once you create the LLC, copy the registration number from the Secretary of State. Then, visit the IRS website to apply for your Employer Identification Number (EIN) and follow the prompts for the online process. At the end of the process, you will be able to have your new EIN forwarded to you by regular mail or you may download a PDF with your EIN number.
Apply for any other licenses and permits that your city, county, and state may require. If you are selling retail, you will also need a sales tax number from the state. Different types of businesses may need different licenses and permits, though almost every city requires an operating permit to run a business.