How do you form a Limited Liability Company (LLC)?

Friday, January 17th

How Do You Form a Limited Liability Company (LLC)?

A limited liability company (LLC) is a hybrid entity that has characteristics of a corporation and a partnership. If you are the company's only member, it is a hybrid between a corporation and a sole proprietor upon creation. Of course, you can elect to have your company treated like a corporation for tax purposes after it has been officially created. Let's take a closer look at the steps that you need to take to form an LLC and the steps needed to change its tax status after this happens.

Make Some Decisions

Prior to filing any paperwork, you'll need to decide where your company will be formally established. Typically, this is the state where your company has a nexus, which simply means the state where it has the strongest connection. For example, if your firm is headquartered in Michigan, it will likely file to be an LLC in Michigan.

After deciding where your company will be located, you'll need to designate an agent who the state can contact if it becomes necessary to do so. You will also likely need to provide the names, addresses and contact information of every person who is a member of the LLC. A member is similar to an owner in that they get to share in the profits or losses of the business.

However, because an LLC is not a corporation, it cannot have any shareholders. As a general rule, anyone can be a member of your company regardless of their citizenship or residency status. Furthermore, other LLCs and corporations can be members of your company without breaking any legal or ethical rules.

Finally, you'll need to think of a name for your business that represents your brand while also conforming to state laws. In some states, the name will need to have LLC at the end to be considered valid. It may be in your best interest to consult with an attorney prior to choosing a name to make sure that it will be accepted without delay. An attorney may be able to do a trademark search to ensure that your firm's name doesn't violate the rights of an existing person or business.

File Your Articles of Organization

When you're sure that everything looks right on your organizing documents, it is time to send them to the state for review. In New York, they would be sent to the Department of State, and you can choose to submit them either by mail or online. The same is true in most other states, and it's generally in your best interest to submit documents online whenever possible. This is because they'll generally get to the state faster and in a more secure manner.

Most states charge a filing fee that is due when you submit your paperwork. You can check with your state's government to determine the filing fees and the various ways that you can pay them. In most cases, you'll be allowed to pay by check, debit card or credit card.

It can take anywhere from several hours to several days to get a response as to whether your company is authorized to operate as an LLC. If there are any issues that need to be addressed, you will likely be notified by mail, and you will have a chance to fix them and resubmit your paperwork.

Assuming that everything is in order, you will generally be able to start operating as an LLC the moment that your organizing documents are approved. Depending on where you form your LLC, there may be additional steps that you'll need to take to ensure that it can continue to operate there for the long-term.

What Happens After You Form Your LLC?

In Arizona, Nebraska and New York, you need to publish your organizing documents in an approved newspaper for up to 60 days. Often, you'll need to pay for space in at least one paper that publishes daily and another that publishes on a weekly basis. You can check with your state business authorities prior to forming your company to determine what your obligations are. Alternatively, you can check with an attorney who specializes in LLC law.

Your company may need to pay a franchise fee or tax on a quarterly or annual basis. This fee may be either a flat rate charged by the state where your company is located or a percentage of revenues earned during the year. As with other business laws, you can learn more about the franchise fee requirements in a given state by visiting its business tax website or by talking to your attorney.

If you don't pay the tax in a timely manner, your company may be dissolved. The same is true if you don't pay other business taxes that a state or local government may impose. In the event that you choose to dissolve the company voluntarily, you'll need to fill out a form notifying the state where the business is based that this is taking place. Of course, you'll still be liable for any debts or back taxes owed at the time your firm stops operating.

How Do You Change the Way Your Company Is Taxed?

When your LLC is first formed, it is considered a sole proprietorship or partnership by default. This means that the profits or losses from the company flow through to your personal tax return and are taxed at your personal rates. Furthermore, you will typically need to pay self-employment taxes on any profits that you receive from your LLC that retains its default status.

However, by filing Form 8832, you can choose to be taxed as either an S corporation or a traditional corporate entity. If you opt for your business to be treated as an S corporation, it will remain a pass-through entity. However, you don't need to pay self-employment taxes on any profits that are deemed to be an owner's draw as opposed to wage income.

If the company elects to be treated as a traditional corporation, profits and losses are first taxed at the corporate level. Any funds that are distributed as salary, bonuses or dividends are then taxed at the recipient's personal income tax rates.

You Can Delegate the Formation Process to an Outside Party

Forming an LLC is a relatively easy process to complete, especially if you do so online. However, if you'd like, you can delegate the majority of this process to an outside person or entity. If your company has a legal adviser, this person may be able to draw up legal documents, submit paperwork to the state and take other actions on the company's behalf.

It's also worth noting that you should have a written business plan and operating agreement before starting your LLC. Although you don't actually have to provide these documents to anyone, they can help guide your company as it faces the challenges of growing and evolving in a 21st century business climate. A written operating agreement can be especially helpful if a dispute arises between yourself and other members. When written properly, it can make it easier to resolve conflicts without spending a lot of time or money in court.

Protect Yourself

If you are looking to create a wall between yourself and your company, it may be in your best interest to organize your firm as an LLC. In addition to protecting your personal financial and tangible assets, this structure may offer a chance to save money on your annual tax bill. Ideally, you'll talk to a legal or business adviser before deciding if forming an LLC is the best way to meet your company's current and future needs.