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How to Start a Limited Liability Company

It is important to know the proper steps you should take to start a limited liability company.

If you are planning on starting a company, one of the first things to do is to take into consideration the tax and liability issues that come with starting a business. These issues will determine what type of a business entity you should use. The type of business entity you use determines how the state and IRS will deal with your company. You may wish to consider a Limited Liability Company (LLC). An LLC will probably give you twice the asset protection you can get out of a corporation, and you get to choose how it will be taxed.

An LLC is a legal structure created by state statute that is best described as a combination of a corporation and a partnership. It has the limited liability features of a corporation and the charging order protection of a partnership. It also gives the owner the operational flexibility to choose the type of tax treatment desired.

If you are wondering how your state stacks up with its LLC laws, it may help to know that most states follow the Uniform LLC Act. Follow this link to read this act: the Uniform LLC Act.

Starting an LLC

Naming Your Business

Starting a business is a little bit like having a child.  In both cases, one of the first things you do is choose a name. The name you choose should both reflect your business and be unique to you. The name should be different from other businesses in your state and on the internet. Make sure to check with the division of corporations in your state to see if the name is available. That will make it easier to avoid trademark issues.  You may also check the U.S. Patent and Trademark Office’s trademark search tool to see if a similar name, or variations of it, are trademarked. For the internet, check name availability by trying to get a web address for the name.

Note that your name must include the letters LLC or some indication that you have a limited liability company.

Next, decide where to form your business. You may have heard different things about which state to form your business in, but generally it is best to “situs” (locate) your business in the state where you are doing your business.   This will generally give you the best and least expensive asset protection. Some states are more expensive than others for forming an LLC. You won’t save money by running to another state, because the state where you are doing business will require you to pay all of its fees and submit your LLC to their laws on top of the other state’s fees and laws.

Articles of Organization

The “Articles of Organization” are a simple two or three page document that you file with your state. Most of the states have their unique articles of organization forms online.  Sometimes they may be referred to by different terms such as certificate of formation.  All states have these forms on the internet so they can be filled out and filed online, and some states now require online filing.

Your Articles of Organization should include information like your business name, address, and the names and addresses of the members. Use your state’s form. As you fill out the form, resist the impulse to give extra information. The less you give, the better asset protection you will have.  Therefore, give only the information required. Once you have filed out the form, you will either file it online or by mail, usually with the Secretary of State.  Some states will ask you to file with a similar office that may have a different name such as the State Corporation Commission, Department of Commerce and Consumer Affairs, Department of Consumer and Regulatory Affairs, or the Division of Corporations & Commercial Code.

Operating Agreement

Once your Articles of Organization are filed and the state fees are paid, the state says you are in business as an LLC. Don’t stop there! While many states do not require operating agreements, they are vital to your company’s asset protection. The Operating Agreement is your chance to write the rule book for your company. These rules will direct your LLC’s finances and organization, as well as provide rules and regulations for smooth operation. They may even determine how a lawsuit against your company will be judged. The operating agreement usually includes percentage of interests, allocation of profits and losses, and member’s rights and responsibilities. There are many other provisions that should be included. A good operating agreement will be 20 -30 pages long and address many issues.

The internet forms you get from LegalDoom sites are about five pages long. If you would like a complete operating agreement get a free copy at http://www.legalees.com/products/operating-agreement/ . It may also be worth checking out my LLC packages.  It is important for you to know which options on the form will be best to choose for your particular business.  My packages include editable copies of both the Articles of Organization and Operating Agreement, together with hours of audio instruction taking you through the documents section by section so you can understand the how and why in order to make the best choices.

LLC Taxes

For federal tax purposes, an LLC can be taxed any way you choose. You could choose to have your LLC taxed under Chapter C of the IRS Code, like a C corporation. However, LLCs are commonly taxed as a “pass-through entity.” This means that all federal income taxes are passed to the LLC’s members and are paid with their personal income taxes. Note that some states tax LLCs at the company level, so check with your state’s tax laws.

It’s sometime a hard concept to grasp, but the taxation of an LLC has nothing to do with the asset protection value of an LLC. For example, many people choose to have their LLC taxed under partnership IRS rules. That doesn’t mean the LLC is a partnership for asset protection considerations. A partnership business entity is a disaster for asset protection, but an LLC taxed as a partnership is just fine when asset protection is considered.

If there are multiple members in your LLC and you do not file special forms with the IRS, you will automatically be taxed as a partnership. If there is only one member in your LLC (you), and you do not file special tax forms, your LLC will be taxed as a “disregarded entity.” That means, your LLC will be taxed to you using standard Schedule C filings with your 1040 form. The tax identification number for your LLC will be your Social Security number if you are being taxed as a disregarded entity.

However, it is best to formally let the IRS know what you are doing. You can use form 8832 to have the IRS classify your LLC as a corporation, partnership, or disregarded entity. You get to choose how you want to be taxed. How you want to be taxed will mostly depend upon how you are going to make money. Will your income be “passive income” or “active income”?   If you want to be taxed as a corporation (either C or S), you will need to file the appropriate forms with the IRS. A 2553 IRS form will be used if you want to be taxed as an S corporation.

If you have a question on which entity to choose for tax purposes, check with your accountant and attorney. They can advise you on the pros and cons of each entity. You must file prior to the first two months and fifteen days of the beginning of the tax year in which the election is to take effect.

Summary

Starting a Limited Liability Company is a good way to protect your little company and yourself. We haven’t talked about charging order protection, but it is as important as the “corporate shield.” The LLC is unique in that it can save you and your business from liability issues while giving you a choice to make certain it gets the best tax treatment. This is very different, because in a corporation, you only get protection for you and you can’t choose your tax structure. There is no “company” protection with a corporation.

However you have your LLC taxed or structured, making certain everything is in place can make a big difference to you and your company.