Forming a Limited Liability Company is a little more detailed than filing a sole proprietorship or a general partnership, but can still be easy with these 8 steps, I will help you to take some of the difficult parts out of the “how to’s” of forming a limited liability company.
Also, check out some of my other articles to learn a little more about LLC’s, their pro’s and their cons.
What is an LLC and Why Forming a Limited Liability Company Can Be a Good Idea
A limited liability company (LLC) (not a limited liability corporation) is an attempt to build a business type with the best of both worlds- control of a company with the liability protections of a corporation.
LLCs are formed by owners called “members” and come in two varieties: 1) single-member who act like and are taxed like a sole proprietorship and 2) multiple-member who act like and are taxed like a partnership.
The process of formation is the same regardless is single or multiple members and is a fairly simple process in most states. But there are some decisions the member(s) need to consider before (and after) making the application.
Determining Members of the LLC
Members of an LLC can be:
- Individuals who live in the United States
- Corporations, partnerships, and other LLCs
- Trusts and Estates
- Foreign individuals (but not foreign businesses).
A word of advice- while foreign individuals can be members, they must possess a green card or E-1 or E-2 visa to own it. An ITIN card is not enough to own but will be required when it’s time to pay taxes. It is best to have a conversation with an experienced business attorney in the state you plan to file in as there are many tax and legal consequences to foreign ownership.
If an LLC decides to elect S Corp tax status, only US individuals, certain trusts, and estates may be members. Corporations, partnerships, Non-resident aliens, insurance companies, some financial institutions, and domestic international sales corporations are prohibited.
Determining Management of the LLC
When forming a limited liability company, owners must decide on the management style. Two varieties are available to the management style of an LLC, member-managed, meaning that it is managed by one or more members; and manager-managed, meaning that it is managed by hiring managers that are not members of the LLC.
Manager-managed is more likely when businesses are the members and don’t have time to run their own businesses and the LLC they are members of, especially if more than one business is a member.
Registering the LLC with Your State
Forming a Limited Liability Company requires owners to register the LLC with the state of their choosing by filing with the business division of that state (usually the Secretary of State) by following the instructions of that state, as the requirements vary from state to state. It is usually best to file in the state that the business home office is located. (Need to file in other states is discussed below)
Getting an Employer ID Number (EIN) for LLC
Whether the members plan to hire employees or not, the LLC should still obtain an EIN which is a federal tax id for businesses. You will have to have this number for many business needs, such as contracts and business checking accounts.
Here is an article on the 4 simple ways to apply for the EIN.
Beware of fake scam application sites, the IRS site is all you need to apply online.
Creating an Operating Agreement for the LLC
Regardless if you are setting up a single or multi-member LLC, an operating agreement needs to be created. This sets out the decisions about the business, including member responsibilities, distribution of profits (or losses), how disagreements will be settled, how the LLC will handle member deaths, wish to leave, or being asked to leave. It also will cover how any changes will be made in the future and the requirements to make those changes.
Each state has default rules on operating agreements that are not covered in a specific agreement, so be sure to study your state’s default rules to know which you need to be sure to follow if not what you agree with.
Register for State Taxes
Registering your LLC with the state and filing for an EIN does not cover registering for employment and sales tax purposes.
If you are selling taxable products or services according to your state, you will need to register so with the same tax authority. State laws on taxing internet transactions are changing in many states in the wake of a recent Supreme Court decision, so if this applies to the LLC, you must register and collect the sales taxes.
If you have employees or plan to, you may have to also register with the state and withdraw and pay employee income taxes to the state’s tax agency.
Decide on Taxing Structure
An LLC can be taxed as a sole proprietorship/partnership style (default) as a pass-through entity or it can choose to be taxed as an S-Corp or C-Corp. It is best to speak to a tax or/legal advisor prior to electing a corporate status as this can only be changed at the start of a new tax year.
While the S-Corp status is still a pass-through entity, making this election allows the owners to divide their earnings between salary and dividends. Dividends don’t have to have self-employment taxes paid on them, saving the owner 15% on each dollar paid as a dividend.
Registering in the Other States
If the LLC does business in more than the state you’re originally registered in, you will need to register as a “foreign” LLC in the other states. Imagine you set up your business in Mississippi (my home state) and now have decided to open a store in Alabama or Tennessee, you would now need to register as a foreign LLC in that state.
I hope that by following these easy steps it will make the task of setting up a LLC a lot less challenging for you. Good luck with your endeavors!