If you are planning on starting your own business, then there are a few different business types to consider. One of the most popular types of businesses for people to start at this time is an LLC, otherwise known as a limited liability corporation.
Today, we’re going to cover what exactly an LLC is, what its advantages and disadvantages are, and how to start one. We’ll also take a look at some of the best and worst states to start a limited liability corporation in.
What Is an LLC?
As mentioned above, an LLC is also known as a limited liability corporation. This is a specific type of business structure that combines the limited liability protection of a corporation with the flexibility of a regular partnership.
An LLC has many different advantages, with one of the biggest ones being that it provides owners with liability protection while also allowing for pass-through taxation simultaneously.
What it comes down to is that the profits and losses of the company are reported on the individual tax returns of the members, and the company does not pay taxes on its income at all.
Pros and Cons of Starting an LLC
Let’s take a quick look at both the advantages and disadvantages that come with starting a limited liability corporation.
Pros
- Simplicity: A limited liability corporation usually doesn’t require many different formalities, especially when compared to other business types, with corporations being a prime example. For example, you don’t have to hold annual meetings, combined with less stringent record-keeping requirements.
- Taxation: Limited liability corporations are very flexible in terms of taxation. Profits and losses are passed through the owners, which then takes the form of personal tax income, as opposed to taxes on the corporation’s income.
- Authority: If you have an LLC, it makes you look much more credible and authoritative in the eyes of partners and customers.
- Liability: Perhaps the biggest advantage of forming an LLC is that it provides you with personal liability protection. Here, the personal assets of the owner are protected from debts or financial actions taken against the LLC.
Cons
- Ownership: In a variety of states in the USA, limited liability corporations may not be able to own other limited liability corporations.
- Fees: Starting an LLC can be quite expensive, as there are annual report fees, filing fees, fees related to requiring a registered agent, and more.
- Taxation: Owners who are closely and actively involved in operating the LLC business may still be subject to self-employment income taxes.
- State-Specific: Every state has specific regulations surrounding forming and running a limited liability corporation, which can cause problems in some areas of the USA.
Starting an LLC: A Step-by-Step Guide
If you as a new potential business owner would like to start a limited liability corporation, here are the steps you’ll have to follow to do so.
1. Choose the Name
You must choose a name for your business, and this must be one that is not already registered in your specific state of residence, and it must be unique.
Each state has its own business registration website where you can check the availability of the name you want to use for your LLC. There are also business name generators, like our BNGai, that will help you find a name. Our AI-powered tool can also help you check to see if the domain for that business name is available.
A big tip here is to use names that are very easy, short, and simple. You want business names to be easy to remember and easy to find. However, the name of your business should also closely reflect the identity of your brand, as well as the services and products that are offered by you.
Your brand should be extremely relevant to the industry and easy to pronounce as well. Furthermore, using geographic locations as your name is not recommended because this may limit the potential of expansion for the business beyond that specific location.
Also make sure that the business name is not already trademarked before choosing it, or else legal issues may arise in the future.
More: Is My Domain Name Available? The Ultimate Guide
2. Find and Appoint a Registered Agent
States will have slightly different requirements in terms of the regulations as to who can serve as a registered agent, and what the specific possibilities will be. Therefore, you first have to determine what your state requires.
There are also professional services out there that will act as registered agents. Of course, these companies will charge you a fee to help you find a registered agent, but they are easy to use.
Furthermore, they’re a great option for people who don’t have individual agents and want to make sure that the role is being performed adequately. You may of course choose an individual person to be your registered agent.
That being said, once again, your state has specific requirements, so you must keep these in mind.
First and foremost, the person you choose to be the registered agent must have a residence in the state where the LLC is based. This person must generally also be available during normal business hours and have an address in said state.
3. Filing Articles of Organization
To make it official, you’ll have to fill out some legal documents to form your limited liability corporation.
- You’ll have to choose the name of the business
- You’ll then have to list the address
- List the purpose
You’ll also have to determine:
- how long the LLC has existed already
- what is the name of your registered agent
- what is the address of your registered agent
These articles of organization have to be filed within the state Secretary of State or a related agency. There will also be a filing fee.
4. Create an Operating Agreement
You will then have to draft what is known as an operating agreement. This is a specific type of document that outlines the structure, operating procedures, and management of the LLC.
The Operating Agreement is not something that is required in all states by law, but it’s always a good idea to have it.
This is because it clarifies the responsibilities and roles of all members. It also helps to prevent any disputes from happening in the future.
5. Obtaining Licenses and Permits
Exactly what type of permits and licenses you will need depends on both:
- the location you are in
- the industry you are engaged in
Before you can operate any business legally, you’ll most likely need a variety of permits and licenses.
You can refer to your local government to determine which of these licenses and permits you’re required to operate your LLC.
There are some which will require more documentation, such as:
- a business plan
- proof of insurance or proof of financial status.
It’s also very important that you renew your permits and licenses on a regular basis.
6. Get an Employer Identification Number
The other thing you’ll need to get is an EIN or employer identification number. This is a nine-digit number that is unique to everyone, and is assigned by the IRS or internal revenue service. This is designed for tax purposes. You’ll need to go to the IRS website to apply for one.
The vast majority of LLCs require an employer identification number. There are a few exemptions, such as if you are just a single person who does not have any employees. If you don’t have any employees, then you aren’t an employer, and will not require one.
You’ll need to provide some information to get your EIN, such as:
- the type of business (LLC)
- your name
- address
- social security number
Once the application is completed and accepted, you’ll get confirmation via email or mail.
The Best and Worst States to Start an LLC
As mentioned previously, how good starting an LLC is depends on the state in question. Keep in mand that some make it much easier than others.
The Best
For instance, states that have very low or no taxes on LLCs are:
Most of these states also provide other specific and unique benefits for LLCs.
The Worst
Some of the worst states in the USA, ones that have unfavorable laws for LLCs, including very high taxes include:
Other Important Facts About Starting an LLC
There are a couple of other things you need to know before you start an LLC in the USA.
- On average, it should take between 2 and 3 weeks to start an LLC, although it may take up to 6 weeks, with Arizona being a prime example.
- The cost to start an LLC depends on individual states, but may cost anywhere between $50 and $500.
Conclusion
Starting an LLC can be beneficial for several reasons, with taxation and personal liability benefits being just two of them. You should now know everything there is to know about forming your own limited liability corporation.
Read more: How to Start an LLC: A Step-by-Step Guide
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