Starting any new business venture always entails a level of risk. You never know how markets will shift, how consumers will respond, or what obstacles you’ll meet in your path toward success.
While entrepreneurs cannot guarantee that their business will thrive, they can at least start off with a firm foundation. Choosing the right legal structure for your business can mitigate risk and greatly enhance your odds of making a long-term impact.
For a majority of entrepreneurs, the best startup structure is the Limited Liability Company, or LLC. This article will cover the basic benefits of the LLC, along with practical guidelines for how to start one.
LLC Basics
First, consider some foundational points about how LLCs operate.
The LLC is one of a handful of legal structures you can choose for your business, along with Sole Proprietorships, Corporations, and a few others.
LLCs have been around since the 1970s, and in that time they have become a popular choice across virtually every industry.
Forming an LLC helps you establish your business as a distinct legal entity, not just an extension of yourself.
Unlike Sole Proprietorships, LLCs allow you to keep your personal assets and liabilities separate from your business assets and liabilities.
For most entrepreneurs, registering an LLC is a straightforward and affordable way to establish some important legal protections for you and your business.
LLC Benefits
Next, consider some of the primary incentives for choosing the LLC format.
Because LLCs allow you to separate your business finances from your personal finances, you can shield your personal/family assets from creditors or litigation.
LLCs confer professionalism and credibility, making it easier to earn the trust of investors, lenders, and business partners.
Registering an LLC allows you tax flexibility, letting you choose how your startup will report to the IRS (pass-through or corporate taxation).
Administratively, the LLC format is simple and straightforward, giving you a lot of latitude for how you’ll structure your management team.
Compared with Corporations, LLCs have very light regulatory requirements, allowing you to focus more time on actually running your business.
These are just a few of the reasons to pursue LLC formation for your business startup.
How to Register an LLC
The specifics of LLC formation vary a little from state to state, and before you get going, it’s always wise to consult state-specific guidelines. For the most part, the LLC registration process will look as follows.
1) Choose a state for registration.
Legally speaking, you can register your LLC in the state of your choosing.
Practically speaking, it’s most financially advantageous to register in the state where you’re based and where you make money. Otherwise, you’ll likely need to register in multiple states, which might mean double the registration fees and double the taxes.
There are exceptions. If you’re starting a business venture to invest in real estate, you’ll want to register your LLC wherever your properties are located. And if you’re not actually based in the US, you’ll have a little more leeway to pursue states where LLC laws are most favorable. (Delaware, Nevada, and Wyoming typically top the list.)
2) Select a name.
When naming your business, you have to think beyond marketing and branding. There can also be some important legal implications. Specifically, LLCs are required by law to choose names that are not already in use by another LLC in the same state.
In most states, you should have access to a searchable database, allowing you to verify that your chosen legal name is still available.
3) Appoint a Registered Agent.
All LLCs are required to have a Registered Agent. This can be a person or an institution. Registered Agents have the simple responsibility of receiving and maintaining any legal documents that are addressed to your startup, including subpoenas and tax records.
When choosing an Agent, it’s important to select someone with a physical mailing address in the state where you have registered. Having a P.O. Box is insufficient.
Also note that some states allow you to serve as your own Registered Agent, but it is much more common to hire a third-party Registered Agent service. Rates are often as low as $100 annually. For more insight, consider Legal Zoom reviews for LLC services.
4) Create an Operating Agreement.
While Operating Agreements are not legally mandatory, they can certainly be useful. Specifically, these documents can help you mediate legal disputes down the road.
Basically, an Operating Agreement outlines some of the aspects of how your LLC is managed. It might cover topics like:
How you and your business partners divide your shares of the profits.
How you and your business partners split day-to-day operational duties.
How you’ll handle partners who wish to exit the company.
How you’ll handle new partners who wish to come on board.
5) File Articles of Organization.
This is the document you’ll need to formally register your LLC with the state. You’ll file it with the Secretary of State, and you’ll also need to pay your state’s filing fee. Depending on where you are, this may be between $15 and $300.
6) Claim an EIN.
Your business will need an Employer Identification Number, which is sort of like an SSN, but for business entities. You can claim one from the IRS, and if you’re a US resident then it’s free. You will need this number in order to administer payroll and process your taxes.
7) Establish a business banking account.
In order to preserve the separation between your business and personal finances, it’s imperative to open a business banking account. Ensure that it’s not connected in any way to your personal savings or checking accounts.
Position Your Startup for Lasting Success
As you consider your options to establish a thriving startup, make sure you account for different legal avenues. For the surest foundation, register your new company as an LLC.
About the author:
Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about content and social media marketing.
