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A Complete Guide to LLCs

Top10.com Staff
Legal Service Providers
If you're interested in starting up a business or non-profit organization, you may have asked yourself at some point, "What is an LLC?" An LLC, or a Limited Liability Company, is a hybrid of a corporation and a partnership or sole proprietorship.

LLCs are not taxed the way that corporations are; instead, they are given pass-through tax status, and each member of the LLC is considered as self-employed and is responsible for federal income taxes, although some states tax LLCs directly. LLC is the simplest, low-paperwork way to structure a new business, keeping your personal assets separate and safe from your businesses ups and downs.

What are the Benefits of an LLC?

The reason that many people choose to incorporate as an LLC is because it offers some of the protections of a corporation but offers its members greater flexibility. If an LLC is sued, the members of the LLC have certain protections and their personal assets are generally exempt. LLCs also have the advantage of offering greater ability to share profits and require less record keeping than a corporation.

How to Register an LLC

Although you can do it in person, most people find registering an LLC online to be the easiest way to go. These services can all be offered through online legal service providers like Bizee or ZenBusiness. Each online provider will have the legal background and resources to make the process smooth and easy, at a fraction of the cost of retaining a law firm. Whatever method you choose, you'll need to:

Select a name for your LLC

Your LLC must be identified as such, and most organizations simply include LLC in their operating name. LLC names must also be unique to their state. Some states maintain a list of prohibited words, such as corporation, bank, etc., so business people should check with their state to make sure the business name qualifies.

File articles of organization

This document must be filed with your state, and it will contain information about your business, including its name, purpose, location, registered agent, management structure and duration. You can chose to create this document on your own, but there are a number of services online that will do this for you once you provide them with basic information. These services will also usually file the document with your state on your behalf.

Create an operating agreement (optional)

These documents are not mandatory in most states, but it is a good idea to create one anyway to map out how your business will operate and who will have which rights and privileges. Topics that are generally covered in operating agreements are how profits and losses are divided, members' voting rights and the process for dissolving the LLC. The more you iron out in the operating agreement, the less cause for discord you may have down the line, however there are standard starting points and templates that can be used to make this process easy and customized to your business.

Research filing laws or dates particular to your state

As well as registering your LLC, you'll also want to look into the laws that your state has in place for these organizations. You may be required to pay additional taxes, filing fees and follow particular regulations depending on the type of organization you have, and it is best to know what you're getting into ahead of time. You can also often find this type of information on government websites, but if you're pressed for time, as most business owners are, you should consult with filing experts from online legal service providers like IncAuthority or Swyft Filings. Both firms have specialists on call ready to help you with your specific questions.

Forming an LLC

Forming an LLC is not difficult. Of course, there is a lot of paperwork, but most of it is just time-consuming rather than demanding. To begin, a person forming an LLC must choose a unique name that ends with the term "LLC." Some states maintain a list of prohibited words, such as corporation, bank, etc., so business people should check with their state to make sure the business name qualifies.

After that, one must file the applicable forms with the state in question. If the company is going to be operating in multiple states, the business owner must file a form in each state. The filing fee for doing so varies by state, so it's a good idea to check with the applicable state agencies before beginning. Also, if there are going to be multiple owners or officers of the new limited liability company, they must choose one of their number to be the "agent of the LLC." This person would receive all legal and business-related communication should there ever be a lawsuit against the LLC.

The Operating Agreement

Although it's not required by law, it's definitely worthwhile to have an operating agreement. It outlines such potential sticking points as each member's:

  • Voting power
  • Responsibilities in running the business
  • Percentage of ownership
  • Share of profit and/or loss
  • Wishes should he or she die, become disabled or incompetent or sell his or her share of the company

Even if no one leaves the company, the agreement should also detail procedures for bringing new members on board. An operating agreement can cover rules, regulations and provisions for the company as well as how financial and functional decisions will be handled.

Permits and Licenses

Also before the doors open, the business must ensure it's allowed to operate in its area. Different classes of businesses have various requirements; some need an officially issued business license, while others need only a tax-identification certificate. Still others might only need a permit to sell their items. Some states require a combination. In all cases, it's best to contact the state licensing authorities, or have a lawyer or online legal service provider get all the information and requirements needed beforehand.

LLC vs. Corporation

One of the major differences between LLCs and corporations is that an LLC is a pass-through entity. This means that any incomes or losses generated via normal operation pass directly to the firm's owners and investors. In most corporations, incomes and losses are directed back to the business entity itself. While this does mean that owners don't directly retain the profits, it also means that they're not directly answerable for losses. There are also specific tax advantages for both LLCs and Corporations that may benefit your business depending on how many partners there are and what the profits earn the shareholders and business owners.

Ready? Let’s Go

The best first step to setting up your business is to consult with small business experts in the field. Consider your business strategy and financials, consult with experts from legal service providers like Rocket Lawyer, and read online reviews. Compare companies and firms based on their pricing structures, customer service, speed of service and the variety of business services they can offer to your business. Filing an LLC is the first step in making your dream a reality.

Top10.com Staff
Top10.com's editorial staff is a professional team of editors and writers with dozens of years of experience covering consumer, financial and business products and services.