When you decide to start your own business, it is easy to get overwhelmed with all of the different ways of incorporating a business. Between sole proprietorships, partnerships, and corporations, there are enough discrepancies to make your head spin. To make things even more complicated, there are some incorporations that combine different aspects of those three setups, and that’s the case of an LLC. Before we dig deep on how to set up an LLC, let’s see what this type of business structure involves and how it can benefit you as the busness owner.
An LLC (Limited Liability Company) allows for a company to avoid paying double taxation (by not having to pay corporate income tax) while also having limited liability (people who sue are unable to go after the owners or investors, only the company). This combines the advantages of a sole proprietorship and corporation. Before we go into the benefits of an LLC, be sure to brush up on the differences between a sole proprietorship, partnership, and corporation.
So why should you set up an LLC anyway?
Here are some of the advantages an LLC provides:
- Limited Liability- One of the biggest advantages of an LLC is providing limited liability to the business owner. As described above, this means that if someone sues the company, they can only go after the assets owned by the company and not the owners and/or investors. It is especially important as a small business owner to protect your personal assets, as a lawsuit or negligence by an employee can be incredibly costly.
- Less Recordkeeping- Another benefit of an LLC is that they do not require the extra work that a corporation does. Corporations must hold shareholder meetings and keep extensive records of transactions, policy changes, and more. Time is already quite scarce when you are a business owner, so it is nice to not have to worry about shareholder meetings or filling out unnecessary paperwork.
- Tax Benefits- An LLC provides a lot of tax benefits to business owners. It does not hold a specific tax classification of its own, so an LLC can adopt the tax status of a sole proprietorship, partnership, or corporation. Most business owners choose to adopt a sole proprietorship classification in order to take advantage of pass-through taxation. This means that instead of having to pay personal income taxes and corporate income taxes on their business’s profits, the company’s profits will pass-through to be considered only in personal income taxes. This saves the business owner and business itself a lot of money. Check here all you need to know to file taxes as an LLC.
- Corporate Structure Flexibility– A corporation has to have a very specific corporate structure including having a board of directors that oversee company policy and are elected by corporate shareholders. LLCs do not have to have a board of directors which gives small business owners more power and control over the operation of their own business.
- Access to Business Loans- Corporations rarely get approved for small business loans as they typically have more money and are not believed to need small business loans. LLCs, on the other hand, can be approved for a greater variety of business loans.
How to Set Up an LLC in 5 Steps
Now that we have discussed the benefits of setting up an LLC, below are the 5 steps a business owner must follow in order to turn their business into an LLC:
- File a name for your LLC- You obviously will need to name your LLC. You can keep the same name your company currently has or change it while following your state’s secretary of state guidelines. It also must be an available name and must comply with your state’s LLC name rules. Be sure to research if there are any LLC name restrictions in your state.
- File the articles of organization- The articles of organization is a document provided by the business owner outlining the governance of the LLC along with operating agreements and corporate statutes based on requirements in the state of operation. There is also usually a filing fee to be paid which ranges from $100 to $800 depending on the state. To find out more about LLC filing fees and guidelines in your state, check out this comprehensive list courtesy of nolo.com. It includes the requirements to form an LLC in all the 50 states. Simply locate yous state on the list and click on it to know more.
- Create an LLC Operating Agreement- All LLCs must create an operating agreement depending on the rules of their state. Typically, an operating agreement outlines the LLC’s functions and its financial decision process. It also includes the company rules, regulations, and provisions. You can think of this as a contract of the LLC to its employees, owners, and other businesses. An operating agreement is not always required by the state, but it is recommended to always create your own operating agreement because it governs internal operations in a way that makes the most sense to the business owner and is clear to outside parties (including the state which the company operates in).
- Follow any publication requirements- In some states, all LLCs are required to publish an announcement saying they are forming an LLC in local newspapers. Once the announcement is published, they must sign an affidavit saying that the publication requirement was met. This is not required in every state, so be sure to become familiar with your state’s rules and regulations.
- Get all required business licenses and permits- Every business should get all the required business licenses and permits required by their state. In some states, there may be licenses and permits specifically for LLCs. Business owners will, of course, have to get these as soon as they become an LLC.
We hope this article has helped you better understand the benefits and process of creating an LLC. If you want more information on business technology, financing, accounting, and marketing, be sure to subscribe to the Camino Financial newsletter.