If you’re starting a new business, one of the first tasks to tackle is forming your business entity. One of the best business entity options is a limited liability company (LLC) due to the many benefits it offers including personal liability protection and tax flexibility.
Starting an LLC involves several steps, which are detailed here to prepare you to get your LLC up and running.
You also may want to check out these state-specific guides to find details about your state’s process.
Check Your LLC Name Availability
You’ve probably chosen the perfect name for your business, but you’ll need to make sure it’s available to use. But before you do your search, check your state’s LLC name regulations. Each state has its own LLC naming rules, but generally, your name must contain the words limited liability company or an abbreviation (LLC, L.L.C). Your name also cannot be one that confuses your business with a government agency.
States also often have specific words that you can’t use in your LLC name such as university or bank.
Once you’ve checked your state’s rules, you’ll need to do a search on your Secretary of State’s website to make sure that the name is not being used by another business in the state. Every state has a simple search tool online that allows you to search the name or similar names. For example, here is Ohio’s business name search tool.
Next, you’ll need to see if the name has been nationally trademarked by doing a search on the website of the United States Patent and Trademark Office.
Finally, make sure the domain name is available by checking a site like GoDaddy.
Pick Your Registered Agent
Every state except New York requires that you have a registered agent for your LLC, which is a person or entity authorized to accept official correspondence and documents on behalf of your LLC. In New York, the Secretary of State must be your registered agent, although you can appoint another registered agent if you choose.
In all states, you can be your own registered agent, but doing so means that you must be personally available at your registered address during normal business hours. That restricts your ability to go to business meetings or do anything for the business outside the office, so many LLC owners use a registered agent service.
A registered agent service will accept your LLC correspondence and notify you of its receipt so that you don’t miss any important notices or deadlines.
Determine Your Management Structure
LLC owners, who are called members of the LLC, can choose between two types of management structures.
- Member managed: In a member-managed LLC all members are involved in the day-to-day management of the company.
- Manager managed: In a manager managed LLC, one or more members are not involved in the management of the company, but are instead silent partners. Other LLC members are appointed as managers, and/or an outside manager or managers are hired to manage the business.
Some states require that you specify your management structure when you file your LLC documents with the state.
Form Your LLC with Your State
To officially form your LLC, you’ll file a document with your state that will include your LLC name, address, and your registered agent information. In some states you’ll also have to provide member or manager names and addresses.
In most states the document is called the articles of organization, while in other states it’s called a certificate of formation or a certificate of organization. The filing fees vary by state, and range from $40 in Kentucky to $500 in Massachusetts.
The processing and approval times for LLC formation also vary by state and range from one day to three weeks.
Create an Operating Agreement
Only a few states require an operating agreement, but it’s highly recommended that you create one, particularly if your LLC will have one than one member. An LLC operating agreement specifies the ownership percentages of members and how profits and losses are distributed to members. It also contains other provisions about voting rights of members, how disputes are resolved, how ownership can be transferred, and much more.
It’s a wise idea to have an attorney involved in drafting the operating agreement to ensure that all members’ rights and interests are protected.
Elect a Tax Status
If your LLC has only one member, by default, it will be taxed as a sole proprietorship. Sole proprietorships are considered disregarded entities by the IRS and are not taxed. Instead, the profits or losses pass through to the owner to be reported on their personal tax return.
If your LLC has multiple members, the default tax status is that of a partnership. The LLC is still not taxed, and profits and losses pass through to each member based on their ownership percentages to be reported on their personal tax returns. You do have to file a partnership tax return for the LLC, but it’s for informational purposes only.
In both cases, however, profits are subject to self-employment taxes as well as income taxes, which are 15.3%.
But LLCs are unique in that they can elect to be taxed as a corporation if you and your tax advisor determine that it’s financially beneficial. The most common election is S-Corporation status, which still offers pass through taxation.
As per this post, you can start an S-Corp in Michigan with Inc Authority, which offers a free basic plan with all you need to get started.
The benefit of an S-Corporation is that profits from the LLC are not subject to self-employment taxes. However, managing members must be paid a “reasonable” salary as defined by the IRS. The salary is subject to self-employment taxes.
Having an S-Corp also means additional administrative and payroll expenses, so an S-Corp status is only beneficial if the self-employment tax savings are greater than the additional expenses.
When you’re just starting out, it’s likely that the default tax status of LLCs is right for you, but at some point, you may want to elect to be taxed as an S-Corporation.
Apply for an EIN
Also, known as the Federal Tax Identification Number in Wyoming and other states of the USA if you are running a business in different locations, EIN is a unique ID assigned to businesses operating in the US.
You’re required to obtain an Employer Identification Number (EIN) if your LLC has employees or if the LLC has more than one member. A single-member LLC with no employees is not required to have one, but you can obtain one if you choose.
An EIN is similar to a social security number in that it allows the IRS to identify your LLC for tax reporting purposes.
It’s simple and free to apply for an EIN on the IRS website.
Starting an LLC is fairly simple, but make sure that you follow all the steps so that the process goes smoothly and you don’t run into any issues down the road. If you need help, you can opt to use an LLC formation service like ZenBusiness or LegalZoom to handle the process for you. They can even assist you with the operating agreement for a nominal fee. You can also enlist the services of an attorney to help you with the whole process.
In any case, you want to get your business off on the right foot so that you have the best chance of building a successful venture!