10 Considerations When Forming an LLC

A Limited Liability Company, or in short LLC, is one of the most valuable types of business formations available in the US today. It provides you with a business structure that separates your personal and business assets and expenses, reducing your liability. There can be tax advantages to it as well.

While forming an LLC is often one of the best tools for startups and small businesses who desire better protections, the process is more complicated than just completing a feyw documents. There are a number of things you need to consider when forming an LLC that you shouldn’t put off before getting started.

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#1: Is an LLC Really Your Best Option?

Before going further, be sure you have considered the benefits of an LLC and how well they work for your business needs. Here are a few things you should know about them:

  • An LLC creates a separation between your business and personal assets, expenses, and liabilities as long as you keep your funds separate.
  • They cost more than a sole proprietorship or a general partnership but also provide far more liability protection in these areas.
  • You will find that transferring ownership of an LLC is harder to do than transferring ownership if you own a corporation.
  • Your personal assets are protected from lawsuits filed against your company in many situations.
  • You can set up your LLC to have one member or numerous members. You have a lot of control over how you structure your company in this manner.

If you are unsure whether an LLC is the right structure for you or if you should invest in any other type of business formation, consider speaking to an attorney who can offer guidance on your unique situation.

#2: Where to Start Your LLC

Before doing anything else, determine where you should start your LLC. If you are operating a physical location, like a restaurant or store, you’ll need to form your LLC, in most cases, within that state. If you are starting an online business, you can choose any state to form your LLC in as long as you have a registered agent within that state to help you.

There are specific considerations to keep in mind when choosing among the states for your LLC. Do thorough research to know which state fits your business model and needs the best. Here are a few examples of differences in some states and why it matters to choose wisely.

  • For many companies forming an LLC in New York is an option, but doing so means you need to meet the additional requirement of publication (i.e. publishing a notice in local newspapers). It is one of the few states that require this. Keep in mind that this means you will pay more to register the LLC compared to most of the other states, sometimes up to thousands of dollars.
  • Wyoming is an excellent location for those who want to save on taxes since there are no corporate or individual income state taxes in the state.
  • Delaware has a few key benefits as well, including the ability to file your LLC anonymously, not requiring an annual report, and handling business disputes quickly.

#3: Select Your Business Name with Care

Finding a business name is not as easy as it sounds. You have the right to create a name that fits your company just right, but most states have some restrictions on the terminology you can and cannot use. Be sure you take the time to verify this information before starting your LLC application.

Many states have tools on their State Department websites that can help you compare business names with those that are already in use. This can help you avoid trying to name your company something that is already being used.

#4: Consider Whether You Need a Registered Agent

Most states require a registered agent to be named. This is a person that will be available during normal business hours on a consistent basis to obtain mail for your business that comes from the state or other government entities. In short, if you get sued, this person should be available to help you.

You can serve as your own registered agent, but doing so may be complicated because it means you need to be readily accessible all of the time. You can also use a registered agent service to help you with this process.

#5: Talk to a Tax Professional

Meeting with your tax professional is a good idea in every situation relating to money. In this case, forming an LLC could offer some advantages to your business. However, your tax professional may also encourage you to consider an S-corp. How much money you make, how you are structured, and the best savings opportunities are all considerations to make now.

Meeting with your accountant to discuss all options is wise. If they have a good working relationship with you, they will give you insight into which option is best for your needs.

#6: Let a Pro Handle the Articles of Organization or Not?

You can complete the Articles of Organization or Incorporation on your own in most states. Some states offer helpful tools and tutorials to make that process easy. However, there are advantages to turning to a third-party to do this work for you as well, including ensuring it is done quickly and properly, eliminating risks to your business.

You must know what your state requires (and there are a lot of differences from one to the next.) You also need to be sure you meet all timeline requirements throughout this process.

#7: Meet with Your County Clerk to Talk About Licensing and Permits

If you are just opening your business’s doors, you need to be sure you are in the proper right to do so based on your city’s codes. Find out if you need a business permit and license to do so by contacting your local Chamber of Commerce for guidance.

This can help you ensure your business is set up properly and that your registration goes well. It can be an important step in showing your prospective clients that you are a trustworthy organization to work with, too.

#8: Create Your Management Style

Make some decisions on how you plan to manage your business now. The type business formation you choose may stipulate some very specific requirements for you. For example, a corporation must have a Board of Directors, and you’ll need to meet compliance requirements. By contrast, an LLC allows you to structure your business in any way that works for you.

Think about who will run your business now, what your goals are later for transferring that business, and the type of ownership structure you want. You do not have to go public, you do not have to have stock.Understanding what you want early on can enable you to achieve it. It is also highly recommended toconsider drafting an operating agreement, in which you will document and define how the LLC will be managed.

#9: Have You Established Your EIN Yet?

Most of the time, you need to have an EIN to pay federal taxes. You may also need to register in your state for tax identification, though some states allow you to use your federal EIN. As an LLC, you need to have an EIN, even if you do not have employees. It allows the federal government to recognize your business.

#10: Make Sure to Follow Your State’s Ongoing Rules

Does your state require you to update them each year, every other year, or not at all about the changes in your company? What type of fees do you need to pay to maintain your LLC over time in the state? These will differ from one state to the next.

It is best to get this information directly from a professional organization or the state’s State Department. That way, you know it is the most up to date data available. You also want to be sure you connect with that department at least one time a year to ensure your information is up to date and accurate. Do so whenever you make changes to the ownership or structure of your company as well.

The More You Understand, the Better

Forming an LLC is often a solid move as you grow your company. Yet, you do need to know how it works and what type of business formation is best suited for your business. Often, it helps to have a bit of guidance and advice from those who have done it before or a professional service that can guide you throughout the process. The key here is fully understanding what an LLC is, how it will impact the way you run your business, and the proper method for forming one.

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