If you are trying to start a business or a non-profit organization, you may have come across resources suggesting that you form an LLC. But what exactly is an LLC? An LLC or a Limited Liability Company is a legal entity that is allowed to conduct business operations. A Limited Liability Company is a type of business structure that fuses some of the best features of a corporation, sole proprietorship, and partnership.

 

LLCs, similar to corporations, offer limited liability for their owners. However, LLCs are not taxed in the same method used for corporations. Instead, LLCs receive pass-through taxation status similar to a partnership. Each member or business owner has a self-employed status and will be responsible for filing their income tax. There are also some states that will tax an LLC directly.

In this article, we will talk about the benefits of having an LLC, how to register an LLC, choosing the name of your LLC, and other requirements you’ll need.

Benefits of Filing an LLC

So what do you get if you file an LLC? The main reason business owners choose to file an LLC is that it provides the protection that a corporation would offer but with more flexibility in structure. If an LLC gets involved in a lawsuit, the members of that LLC will have some type of protection and their assets will be exempt from the lawsuit. An LLC also has the advantage of affording business owners greater ability in terms of sharing profits. Compared to a corporation, an LLC has fewer requirements for record-keeping.

Pass-through Taxation

One of the key features of an LLC is that it provides business owners, also called members, a pass-through taxations status. Any profits and losses acquired by the business are passed through and received directly by the owner. The net earnings are reflected in the business owners’ personal tax returns and are taxed with a personal tax rate.
This pass-through status for tax eliminates the double taxation setup that corporations normally go through. The double taxation principle refers to one source of income being taxed at the corporate and personal level. In a corporation the net earnings are taxed before giving the shareholders their dividends. Then, the shareholders will pay tax on the dividends they receive.

Protection for personal assets

Another benefit of forming an LLC is the limited liability it provides to business owners. Limited liability is a type of legal protection for business owners and shareholders. This protects an individual from being personally accountable for the business’ debt or losses.

Members of an LLC are not liable for any debt incurred by the business. In the event that creditors go after the business or file lawsuits against the business, the members’ private assets such as bank accounts, houses, and cars cannot be touched.

Flexibility

In terms of ownership, taxation, and management, LLC provides a great amount of flexibility. There are no limits to how many members an LLC should have. A lot of LLCs only have one member, but LLCs are definitely allowed to form with 5, ten, or even 100 members.

An LLC can be directly managed by the members or have designated managers to run theeveryday operations. Managers can be nonmembers, a designated member, or a combination of the two. LLCs also have the option of choosing how they should be taxed. Usually, LLCs are taxed similar to a sole proprietorship or partnership. However, multi-member LLCs and SMLLCs can also choose to get taxed like corporations.

Straightforwardness

Limited Liability Companies are the simplest legal entities to form. LLCs are not required to have corporate officers and directors, shareholder or board meetings, and other formal requirements that are associated with creating a corporation. Due to the simplicity of the requirements, many entrepreneurs and small business owners are attracted to register their business as an LLC.

Credibility

Despite the simplicity and ease of forming and managing an LLC, it still grants businesses credibility. Customers and investors will be reassured that the business is real. Gaining credibility is an important aspect of running your business. If customers do not trust the business name, it will be difficult for you to build a client base, earn income, and achieve growth. A name with credibility will help you achieve better progress in your business.

How to File an LLC?

Forming an LLC is a relatively easy process. You can choose to register the LLC in person, but many people are finding online services that make the process even easier. Whatever choice you go with, there are steps that you’ll need to take care of such as:

• Selecting the name of the LLC
• Filing Articles of Organization
• Creating the Operating Agreement
• Researching laws in your specific state

Choosing a Name for Your LLC

Choosing the name of your business is an important step. You should take some time to think carefully about the name you would like to go by. Aside from finding a name that will be good for branding and marketing purposes, you will have to consider some legal aspects as well.

An important step in naming your LLC is indicating that the business is indeed an LLC. You need to use the term LLC or Limited Liability Company as an official part of the business name. There are certain words that will be prohibited by your state from being included in LLC name such as insurance and bank.

You’ll also need to check existing trademarks to make sure that your prospective business name does not infringe on any active trademarks. The Trademark Electronic Search System is a database from the U.S Patent and Trademark office. It contains registered trademarks and those with pending applications.

File the Articles of Organization

The next step in forming an LLC is to file your articles of organization with the business filing office in your state which is normally your Secretary of State. There are some states which use Certificate of Formation or Certificate of Organization which are the same thing as Articles of Organization.

Articles of Organization may be fulfilled with an online document you can fill in or through a form that is available on the website of the Secretary of State. You need to fill in the name of the LLC, the registered agent’s name and address, and other information such as how the LLC would be managed and the names of the LLC members. There is a filing fee for submitting Articles of Organization which costs $100 on average.

Prepare an Operating Agreement

Although an operating agreement is not a mandatory document in most states, creating one for your LLC is still a good idea. An operating agreement is an important document that gives structure to internal decisions both functional and financial. This will determine how the business operations will be supervised and how the LLC would be managed. Provisions contained in an operating agreement normally include the following:

• percentage of each member’s ownership
• their rights and responsibilities
• powers of managers and members
• how income and losses will be distributed
• buy-sell and buyout rules

There are a couple of reasons why you should draft an operating agreement. One is to protect the limited liability status of the business. It is wise to make it clear through an operating agreement that members of the LLC are protected from having personal liability.

Second, a written agreement between members will minimize any miscommunication or misunderstanding that an oral agreement may arouse. If there is a conflict between members, having a document to refer to would allow members to come to a resolution.

Third, if an LLC does not have an operating agreement, the default rules of the state will be applied in governing how the LLC operates. The problem is that the default rules are sometimes too general and broad, so it’s not wise to completely rely on them. You should check the requirements of your state to see if an operating agreement is mandatory.

Research State and Local Laws

When you start the process of forming an LLC, you will inevitably need to learn about the rules and regulations in your state that govern these entities. There are requirements and regulations that are specific to each state. Even the court fees and filing fees will also differ from one state to another. You’ll need to research filing fees specific to your state and county, if there are any additional taxes you have to pay, and the general laws that govern LLCs.
It is a wise move to educate yourself about these things ahead of time, even before you start drafting documents for your company. Most of the information you would need is often found on government websites and online registration platforms as well.

Conclusion

A Limited Liability Company is a fairly simple type of legal entity. The process of forming or registering an LLC is also easier compared to other types of business structures. There are fewer requirements you need to take care of which include Articles of Organization and sometimes an operating agreement.

Depending on the state regulations, there may be different fees associated with filing an LLC. On average, the cost of filing Articles of Organization will cost more or less $100. Check with your state government’s website for more specific details.