Want To Set Up An LLC? Know The Basics
Limited liability company (LLC) is the legal structure for most small businesses due to the variety of benefits it provides.
For business owners who want personal liability protection, this form of legal structure will make the business a legal entity that can be held liable instead of the owner. Setting up an LLC is a relatively easy task that only takes a few hours. LLCs also offer tax benefits and less hassle when it comes to compliance issues, paperwork, costs, and record keeping.
If you want to set up an LLC, here are the basics that you should be aware of.
One of the main reasons that business owners settle for an LLC is that it offers them personal protection from business-related liabilities. However, the business owners must treat their business as a separate entity to have limited liability, whether it was an LLC, limited liability partnership, limited partnership, or corporation. To be a separate entity, you should open a business bank account for the company, have a different mailing address for the LLC, and keep different books and records. You could lose the benefits of the LLC if a judge deemed it not a separate entity.
LLC Tax Basics
There is no specific tax classification for LLCs, which allows the members to choose a tax classification appropriate to their company. The tax classifications are a corporation, sole proprietorship, and partnership. If the members decide to file Form 2553, the company will be treated legally as an S corporation without the need for LLC incorporation, which might change the hierarchy of the company.
All members must file Form 8832 to the IRS for taxes, and the single-member LLCs can be classified as sole proprietorships if the owner didn’t submit this form. However, the taxes of the LLC are considered a part of the personal tax return, but LLCs enjoy deductions when filing taxes and some tax credits. For example, if you are working from home, you can consider your home office a deduction.
LLC Management Basics
Unlike corporations that use a three-tiered management structure, LLC’s management is not complicated. While corporations require to have stakeholders and officers, LLCs don’t require them as a part of the management process. Additionally, LLCs don’t hold regular mandatory meetings. An LLC can be owned by a single person who is called a member. If the LLC is owned by one member, it is called a single-member LLC. If it is owned by two people or more, then it is a multi-member LLC. Members have the freedom to operate the business however they feel fit as long as it is beneficial for the company. To manage the business, members have two ways to do that. The first way is to appoint managers who will supervise the company and handle its day-to-day operations. The second way is for the members to have either direct or indirect managerial roles within the company. This approach will enable the members to divide profits and losses without putting the individual percentage interest of members into consideration.
Forming An LLC Basics
The steps needed to form an LLC are quite simple:
- Choosing a name for your LLC: you must follow state law requirements while picking a name for your LLC. The requirements include not choosing a name that is already used, prohibiting certain words that show you are in that industry, such as banking, and include LLC or limited liability company at the end of the name.
- Assign a Registered Agent: a registered agent is a person or an entity that receives legal documents on behalf of your LLC, and most states require that you have a registered agent.
- Obtain a Copy of Your State’s Article of Organization Form: It has different names in some states.
- Fill Out the LLC Article of Organization Form: Information needed includes business name, business address, business purpose, registered agent contact information, and the duration of the LLC.
- File the Form.
- Create an Operating Agreement: which contains the details of the legal, financial, and management rights of the LLC members.
- Keep your LLC Active.
Knowing these basics will help you make the right decisions when setting up your LLC. You must be aware of what it entails and how to manage it whether you are the only owner or if you have partners. You should know what the procedures for an LLC will be like when you need to do taxes. Finally, keep in mind that forming an LLC is the easiest part of setting up one.