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Monday, February 26th
Forming a limited liability company (LLC) can be an ideal way to protect your assets without creating an undue hardship on your fledging operation. An LLC is generally seen as a hybrid between a pass-through entity such as a sole proprietorship and a corporation. Let's take a closer look at what an LLC actually is, why you might want to create one and how much it might cost to do so.
What Is an LLC?
The LLC structure provides you with the limited liability afforded to corporations without having to create a corporate entity. This is helpful because you won't need to conduct annual shareholder meetings or keep meticulous records of everything that your organization does. You will also be able to reduce the amount of paperwork that your company needs to send to shareholders and government agencies throughout the year.
For tax purposes, this type of company is designated as a sole proprietorship or a partnership by default. Your company's default designation will depend on whether the organization has one member or multiple members. You can change your LLC's tax treatment by filing Form 8832 with the IRS.
Generally speaking, anyone over the age of 18 can be a member of an LLC. In fact, other LLCs, corporations, and other business entities can also own an ownership stake in your business. While you can choose to headquarter your LLC in any state in the nation, you may have to register it in any state where you have nexus.
This means that you may have to pay LLC filing fees, taxes, and other expenses in multiple states. For instance, let's say that you live in New York and run your company from a home office. Since you have nexus in New York, you would be bound by its LLC requirements even if you wanted to base the company in Delaware, Nevada or elsewhere.
What Is the Actual Cost of Starting an LLC?
The biggest expense related to forming an LLC is the filing fee charged by the state where you choose to register your business. In the state of Alabama, you'll pay a $180 filing fee in addition to a $200 annual franchise fee. If you choose to headquarter your company in the state of California, you'll pay $90 upfront and about $810 per year to keep your LLC intact.
In the state of New Jersey, LLCs will be charged an annual fee of $125 per member plus $50. Therefore, if your company had one member, it should expect to spend $175 per year to remain in operation.
If the company had 10 members, it would be charged $1300. In New York, you could pay up to $4,500 per year in LLC fees in addition to an upfront filing fee of $275. The amount that you pay in that state depends mostly on how much your company earns in a given year.
If you are looking to keep your ongoing costs to a minimum, consider creating your LLC in states such as Idaho, Missouri, or New Mexico. There are no annual fees associated with operating such an entity in these jurisdictions. However, you will likely be required to file an annual information report to the authorities in those states.
The reason why companies often base their companies in Delaware or Nevada is that they offer significant protections for business owners. Delaware charges a $300 filing fee in addition to a $90 annual fee while Nevada charges $75 upfront and $300 per year.
Some States Have Additional Filing Requirements and Fees
States can have a variety of additional filing requirements. For example, the state of New York requires you to notify the public that you have created an LLC. This public notice must be published for six consecutive weeks in at least two approved newspapers that circulate in the county where the LLC is located. One of the newspapers must be printed on a weekly basis while the other must be printed on a daily basis. The states of Arizona and Nebraska also have publishing requirements.
Your company will be responsible for paying any fees associated with doing so. As a general rule, publications in smaller towns or cities charge less than those that circulate in major cities. However, the only way to know how much a publication will charge is to contact its advertising director.
These states generally require you to meet the publishing requirement within 120 days of obtaining authority to operate there. If you fail to meet this requirement, your ability to do business will be suspended.
Finally, some states will charge for the right to reserve your company's chosen name. It may also be necessary to obtain local permits, licenses, or certificates to legally operate in a given city, town or village.
Will You Use a Lawyer to Help Create Your LLC?
There is no requirement to use a lawyer to draft or submit LLC documents. However, if you have partners, it may be a good idea to consult with an attorney before your company obtains the legal authority to do business in a given state. Doing so may help to ensure that everyone is clear about their roles within the organization, how the profits and losses will be split and what happens if a partner wants to leave the organization.
Legal fees may range from a few hundred dollars to a few thousand dollars depending on what your needs are. If you simply need someone to write up LLC filing documents or to review an operating agreement, you'll probably pay $200 to $500. However, if you need someone to draft a custom contract or resolve a dispute, you could pay $500 an hour or more.
An LLC May Save You Money Over the Long Run
Although the cost of creating an LLC may turn you off to the idea of creating one, there are several ways in which doing so may save your company money over the long-term. For example, it may be possible to write-off the actual costs incurred when creating your LLC on your business tax return.
As a business owner, your goal should be to turn a profit as quickly as possible. However, the truth is that most companies lose money in their first two or three years in existence. However, since your LLC is a pass-through entity, any losses that it generates will flow to your personal tax return. This may help to reduce your overall taxable income for the year, which could lead to a lower tax bill or a higher refund.
If you choose to have your LLC taxed like an S-corporation, you can dedicate a portion of your income as an owner's draw. An owner's draw is treated like ordinary income instead of regular wage income, which means that you don't have to pay FICA taxes on it.
Protection From Lawsuits Can Also Result in Significant Savings
It's worth noting that creating an LLC can protect you from being held personally liable for the actions of your company. This means that you won't lose your house, funds inside of a personal bank account or other valuable assets as a result of being sued by a client, vendor, or employee. Instead, only the assets held by your company are in danger of being liquidated to comply with the terms of a court ruling.
Regardless of where you choose to create your LLC, you should be able to submit your LLC formation documents for less than $500. However, your costs will vary depending on where your company is located and whether you need legal help in establishing your business. Prior to forming an LLC, it's generally in your best interest to consider all of the potential benefits and drawbacks of doing so to determine if the LLC structure is right for your company. Several online companies exist to help file LLC forms and eliminate the guess work.
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