An LLC, or a limited liability company, is an American business structure filed within a respective state that allows certain pass through taxations of a proprietorship with the limited liability of a corporation. As a small business owner, one might ask, “Does it cost money to start an LLC?” or “Why would I start an LLC?” Consider it one of the important must-haves of any budding company. Businesses of many shapes and sizes benefit from opening an LLC.
Some benefits include protection from personal liability, flexibility in taxes, processing is fairly easy, less compliance paperwork, flexibility in management and structure, and the credibility it lends a business. Opening one involves several steps, but in this article, we will give a brief overview on how to approach opening an LLC.
Chose a Name
Depending on factors like the type of industry and geography, choosing a name is harder than it looks. Choosing a name may seem only for marketing purposes, but keep in mind, this is also how a business will be referred to legally. The name of an LLC must comply with laws of the state in which it is filed. Most states require the following:
- That it end with an LLC designation (as in, ending in LLC or “Limited Liability Company” or “Limited Company”
- That there is no existing business with the same name in the state it is being filed in
Depending on the name and nature of the business, it may be necessary to omit certain terms to prevent misrepresenting the business. For example, titles that imply insurance or banking businesses may be more strict than other industries.
The best source of information for this is through a state’s corporate filing office. This is usually found through the Secretary of State’s website. Some states refer to this as a “certificate of formation” (like Delaware, Mississippi, New Hampshire, New Jersey, and Washington) or “certificate of organization.” (like Massachusetts and Pennsylvania). They would have the most up to date business laws on opening an LLC.
Preparing Paperwork
As discussed above, it is best to start with your state’s corporate filing office, and they will inform you of the “articles of organization” forms required to register an LLC within the state. And as we discussed above, in different states, this can be called different things, such as “certificate of formation” or “certificate of organization”.
Determine The Registered Agent Receiving The Paperwork
A registered agent is essentially the designated person managing the LLC, and in charge of receiving notices, forms, and legal papers from the state. LLC’s are required to have a registered agent.
A registered agent, depending on the state, can either be a member within the LLC, or the LLC can be managed by private service companies, whose sole purpose is to act as registered agents on behalf of an LLC.
If a person within the LLC is acting as registered agent, they generally need to be over 18 years old and have an active physical address in the state the LLC is registered in. They also must be available there during normal business hours.
If a business opts to be represented by a private service company, there will be relevant fees applied to the LLC for the private company’s representation services.
Paying Your Dues
The natural progression of management of a corporation opens up the question of fees and dues an LLC must pay in order to function. We began discussing earlier that having a private service company can manage an LLC for a fee. Some other fees associated with overseeing and running an LLC include:
- A registered agent (if a member of the business does not want to act as the registered agent): fees usually start at $100 and above
- Annual franchise tax: Once established, an LLC pays fees to file with its respective state annually. The same way a person files for taxes annually, an LLC must also file for taxes based on annual income and gross receipts.
- Renewal fees: Every one to three years, an LLC pays renewal fees to maintain their business license in their respective state.
- Formation service fees: This may not always be the case, but for companies that want to expedite the process of opening an LLC, there are formation companies whose sole purpose is to help with opening an LLC and its operations. They also charge a service fee.
Annual and renewal fees have an added penalty that as a proprietor of an LLC, should be minimized and avoided. Staying up to date and avoiding late payment sounds simple enough, but if regular bookkeeping is not maintained, the penalties can sneak up on a business.
Conclusion
An LLC has many flexible, and potentially very positive benefits to a business. It can be very easy and straightforward to start. These days, much of the paperwork can be filed with an external party. Forming an LLC can be outsourced to another party entirely as well. While tedious, these steps are crucial to reaping the full benefits and protections this business entity can offer.