Nolo Review: LLC Formation Services

Things you should know before forming an LLC

Are you thinking about setting up a limited liability company for your new business? This is one of several common types of business structures available to you, and it comes with an extensive range of benefits that may be appealing to you. At the same time, it has several drawbacks that must be considered. By learning more about LLCs in general, you can make an intelligent decision about your business's structure. You can also have all of the facts in place to walk through the formation process without a hassle.

Membership in the LLC

An LLC is structured with a membership base. Each member holds a percentage of the ownership of the entity. There is no limit to the number of members that an LLC can have. In addition to the standard membership, there will be at least one managing member. The managing member or members are responsible for the business's primary operations on a daily basis.

It is important to know that an LLC is formed through your state. Usually, this is through the Secretary of State department. Some states require you to specifically state who the managing members will be at the time of formation. Others may assume that all members are managing members if this is not assigned at the time of formation.

With a corporation and other select entities, the owners or participants in the entity can change by amending documents. With an LLC, however, the entity must dissolve when a member leaves the organization for any reason. If you intend for your business to continue operating after a dissolution occurs, you will need to go through the process of forming a new LLC. With this in mind, it is important to finalize the ownership structure of your new business before you start the LLC formation process.

LLC Personal Liability Protection

Many business owners choose to set up an LLC because of the personal liability protection that it provides. If you choose to run a business as a sole proprietor, you are personally liable for all debts, losses and other credit impacts that occur from your business's operations. This means that your house, vehicles, cash and other assets are at risk. In an LLC, all members enjoy a high level of personal liability protection. This means that your personal assets are not at risk from the business's activities.

However, before you form your LLC, you should be aware that this is not ironclad protection. A legal ruling known as "piercing the corporate veil" may be issued by a judge if you are convicted of fraudulent activities. This may also occur if you did not take reasonable steps to keep your personal and business transactions separate. In the case of this ruling, creditors and others may pursue your personal assets for business debt collections.

The Impact on Taxation

The Internal Revenue Service views a limited liability company as a pass-through entity. Some business structures are taxed directly. For example, a corporation is taxed directly. With a pass-through entity like an LLC, however, the entity's profits or losses directly fall on the shoulders of its members. Each member is directly responsible for paying taxes on profits based on his or her specific ownership percentage. Likewise, an LLC's losses are allocated as a financial loss to the members, and this can directly offset each member's personal tax liability. In addition to this potential benefit to members, you may find that filing taxes is generally easier to do with an LLC than with a corporation.

You should be aware, however, that LLC members may have an additional taxation requirement. An LLC's members are direct owners, and they are viewed as being self-employed by the IRS. Because of this, they are subject to self-employment taxes. This means that they must pay Social Security taxes and Medicare taxes each year based on their allocation of the LLC's profits. This is taxation that is directly based on the LLC's net earnings.

Your LLC Formation Options

You may think that forming a business entity would be a stressful experience, and this may prove to be true when you form some types of entities. Forming an LLC, however, is a straightforward experience with a few easy steps. You can even prepare the few required documents online as soon as you are ready to do so. The first step in forming an LLC is selecting a business name. You can always change the name of your LLC by filing amended paperwork with your state's Secretary of State department. However, it makes sense to focus on building your brand and conducting operations from day one with a name that you will stick with.

After you have a name in mind, you need to decide who the members are and what their ownership percentages are. You also need to determine who your entity's registered agent will be. This is a designated individual or agent who receives service of process for your entity. While it can be a business owner, you may avoid unnecessary compliance concerns down the road by choosing a third-party registered agent.

You will then prepare and file your operating agreement with your state's designated filing agency. Typically, you will be required to pay a formation and filing fee at this time. A few final steps will follow this one. For example, you will need to request an EIN from the IRS. This enables you to file your LLC's tax returns, to apply for a loan and to take other important steps. You will also need to establish a business bank account. This bank account is crucial to keep business and personal financial transactions separate from each other. By maintaining distance in this way, you can protect the personal liability benefits that the LLC provides.

After your LLC has been filed and your business is up and running, you cannot neglect your entity. Different types of LLC maintenance may be required over the years. Through maintenance efforts, you can maintain compliance and ensure that you have personal liability protection going forward. Keep in mind that the LLC maintenance requirements vary by state. Some states, for example, may require the filing of an annual report. This may also be called a statement of information in some states. If this is the case, you must file the annual documentation by a specific date each year to remain compliant. Ensure that you add this important date to your professional calendar so that you do not overlook it.

Some specific LLC activities or events may trigger a maintenance need as well. For example, if you decide to change your entity's name, you will be required to submit an amendment to your state's business filings office. The specific need for a formal, filed amendment may vary by state. Before you firmly decide to form an LLC for your business and complete the easy process online, it is important to research your specific state's LLC requirements. Likewise, you should familiarize yourself with the IRS's LLC taxation rules while you are conducting crucial due diligence.

Set Up Your LLC Today

Have you firmly decided that you want to structure your new business entity as an LLC? The process of establishing a limited liability company is so straightforward that you can do so completely online. An alternative is to hire a business lawyer to facilitate the process. However, many people find that this alternative is unnecessarily time-consuming and costly. You can get started forming your LLC today by researching your state's filing requirements. Then, you can conveniently walk through the final steps online to complete the process. Depending on your state's processing timeline, you may expect to receive a confirmation that your entity is established within roughly a few weeks.