Important Facts to Know About Becoming an LLC

by Frank

Starting your own business is a difficult process. You must make many important decisions, including how you classify your business. There are several different types of classifications, each with different rules regarding taxes, profits and liability. A Limited Liability Company (LLC) is a classification where you are not personally liable for any debts your business incurs. You are also not held personally responsible if your company is charged with a crime.

Each state uses different regulations to determine whether you are able to claim your company as an LLC. Typically, there are few state restrictions. Select states do not allow you to start an LLC if you are not a citizen. There are also some businesses that cannot be classified as an LLC, such as banks and insurance companies. In addition to different eligibility requirements, the process to become an LLC may differ based on location.

Naming your Business

No matter what state you live in, the first step of becoming an LLC involves naming your business. While the name you select is not permanent, it can be a lengthy process to legally change your name, and most states require you to pay a fee for each name change. In the majority of states, your name must have an LLC designator at the end, either the initials or including limited company. If you have an existing business you want to convert into an LLC, you can use your existing name and update it with the appropriate moniker.

Choosing a Registered Agent

The most important step to becoming an LLC is selecting a registered agent. A registered agent can be either an individual or another business that accepts responsibility for your company. If your company is sued, your registered agent acts as the responsible party. The agent also receives any legal notices or tax documents relating to your business. Your registered agent must have a physical address in the state where you register an LLC. A member of your business, including your partners, can act as the registered agent.

Choosing Managers

Your registered agent assumes legal responsibility for the company, but he or she is not in charge of the LLC. As part of the registration process, you must decide on a management system. You can either appoint a single individual to manage your LLC or a board of directors. Most LLCs choose members who are part of the business, but you can appoint outsiders. Your manager or board of directors are responsible for making any major business decisions, such as taking out a loan or buying property.

While it is not legally required, you are strongly encouraged to create an operating agreement for your managers. Your operating agreement sets guidelines for how the LLC is run. It can also include general goals for the company.

Articles of Organization

Once you have a name, registered agent and operating system, you can file for articles of organization. These forms must be filed with your state corporate filing office. This is typically the Secretary of State. In some states, the forms are called either certificate of formation or certificate of organization. In the majority of states, you can file all the articles of organization online. If you are having trouble finding the right documents or organization to file with, you can get help from the U.S. Small Business Administration.

While you are completing the documents, you must also provide your name, the name of any other owners and the physical address of your business. Once you finish the forms, you must pay a filing fee, which costs $100 in most states. If you are starting a new business, you must also apply for an employer identification number (EIN) through the IRS. If you are an existing business, you can continue to use your previous EIN.

Benefits of an LLC

For most businesses, the primary advantage of registering as an LLC is separating the owner or board of directors from the business. With other business models, your personal finances are tied directly to the business. If the business is required to pay fees, such as taxes, you must use your own funds. The business profits also count as your own income, which may put you in a higher tax bracket. With an LLC, you pay yourself and other board members a salary. If the business is sued, you use company money, but are not required to pay the fees with your salary.

Because you are separate from the business, an LLC offers better privacy than other business models. An LLC also provides more flexible management options. For example, if you have multiple members on the board of directors, you can set individual salaries and benefits for each member.

If there are any legal issues, such as an injured party wanting to sue your business for damages, your registered agent represents the company in court. This means you cannot be forced to pay for the damages out of pocket, nor will you receive any other penalties. This does not provide blanket legal immunity, but the process for charging an individual versus a business is completely different, as are the fees and penalties.

Disadvantages of an LLC

There are only a few disadvantages to running an LLC. In the majority of states, your business is often required to pay higher taxes or fees when you register as an LLC. These fees are often why new small businesses do not immediately start as an LLC. LLCs are also more expensive to start because of the additional filing fees, as well as paying for a registered agent. To get the most out of an LLC, you want to have a board of directors. Otherwise, it is much easier for attorneys to target you specifically and not the business.