Forming an LLC
Choosing the right business structure to protect your personal assets is a vital step when starting a new venture. One of the most popular business types, especially among startups with a high risk of failure, is a Limited Liability Company (LLC).
LLCs have many advantages over other business types thanks to their straightforward structure, but they’re not suitable for every situation. The following guide on creating an LLC can help you decide if it’s the right choice for you.
What’s an LLC?
An LLC is a hybrid business structure that combines certain aspects of a sole proprietorship, general partnership, and corporation. These aspects can include personal asset protection, certain tax advantages, and the ability to do business under its own name.
Advantages of Forming an LLC
An LLC offers several advantages compared to other business entities:
- Legal Protection: An LLC will shield you against personal responsibility for its debts or lawsuits.
- Pass-Through Taxes: LLC owners avoid the kind of double taxation that happens within corporations. The LLC’s net income passes directly to its individual owners, allowing them to report profits and losses on individual tax returns.
- Credibility: Having a formal business name means you’ll be taken more seriously by customers, partners, suppliers, and lenders.
- Simplicity: There’s less paperwork when managing an LLC. With no directors or shareholders, and without the need to distribute profits equally based on shareholders, you have fewer procedures to oversee.
Disadvantages of Forming an LLC
LLCs do come with some downsides that you’ll have to weigh:
- Limited Growth: Since LLC owners can’t attract investors through stocks, it can be difficult to raise capital.
- Taxation: LLC owners may incur cashflow burdens. They might need to pay taxes on their share of profits and losses if an LLC is taxed as a pass-through entity.
- Maintenance Costs: There is an annual fee that needs to be paid so that an LLC maintains its status, increasing the cost of having an LLC.
When Is an LLC Right for Me?
- You’re regularly selling a product or service
- You’ve garnered repeat customers
- You’d like a business that can open its own business bank accounts and have its own liabilities and assets
- You’re actively hiring
- You’re starting alongside more than one person
- You want to protect your personal assets
How Do I Form a New LLC?
Creating an LLC requires six steps:
- Select a location to create it
- Name it
- Choose a registered agent
- File Articles of Organization
- Create an operating agreement
- Obtain a Federal Tax ID (FEIN)
Picking a Location
Just as in real estate, it’s all about location, location, location! Even the state where you create an LLC matters. In general, we suggest forming your LLC in the state you live in to simplify your tax situation. The following states, however, do offer certain benefits.
Delaware has some very accommodating and progressive LLC formation laws. Benefits of forming an LLC in this state include, but are not limited to, a lack of corporate income taxes for LLCs that don’t do business in Delaware, no residency mandates for registering your LLC, and limited reporting requirements.
This business-friendly state has very favorable laws for corporations and their management. This includes everything from no corporate, personal, or franchise taxes to not requiring operating agreements or organizational meetings.
Naming Your LLC
Wherever you form your LLC, be sure to follow that state’s LLC naming laws. You can use the state’s Secretary of State website to see if the name you have in mind has been taken. One important thing to remember is that your LLC’s name should represent your service.
With your name chosen, you should decide if you’re going to trademark it. Trademarking is an entirely different legal procedure that includes filing with the United States Patent and Trademark Office (USPTO). The process can take several months and does have associated fees. However, if properly maintained, a trademark can last indefinitely and protect your LLC’s name from being misused.
Choosing a Registered Agent Service
A registered agent is a third party responsible for handing your legal correspondence, such as government notices, lawsuits, and subpoenas. LLCs must have one in each state they’re registered to do business in. You’ll be asked to provide an agent’s name and address on state documents.
A registered agent can be a business or an individual, must have a physical office in the state your business is registered in, and be available at a physical street address. Some states will allow you to designate yourself as a registered agent, but this could make your contact information public, so we recommend finding a third party that works for you.
Filing Articles of Organization
Many states only require you to file Articles of Organization with their Secretary of State to create an LLC. Expedited options are available, but processing times generally range from days to weeks.
The form itself is simple and can even be downloaded from the relevant Secretary of State website, though filing fees will apply regardless of how you file.
Once your documents are approved, you’ll receive a formal certificate from the state. With this, you can obtain a tax ID, business license, and business bank account.
Create an Operating Agreement
Regardless of whether your state requires it or not, we strongly recommend preparing an operating agreement. This agreement outlines procedures relating to an LLC’s ownership, member responsibilities, and operating procedures and adds safeguards and protective measures in case of disputes.
Your operating agreement should have at least the following sections:
- Organization: Includes the structure of ownership, members, and creation of the company
- Management and Voting: Fleshes out the management and voting processes of the company
- Capital Contributions: Outlines how company members can raise capital
- Distributions: Breaks down how profits and losses will be shared among members
- Membership Changes: Goes over the process for adding or removing members as well as ownership transfer
- Dissolution: Gives insight into when and how the company should dissolve
Getting a Federal Tax ID (FEIN)
All businesses must obtain a Federal Tax ID to properly file taxes, open bank accounts, and hire employees. This is a nine-digit number that the IRS issues to businesses based in the U.S. or its territories. You can apply for one online, but you’ll need to have your Taxpayer Identification Number (TIN) or social security number on hand. Otherwise, you’d need to file by mail.
Augment Your LLC With a Virtual Mailbox
Forming an LLC is easy, relatively fast, and offers specific advantages compared to other business types. A virtual mailbox from SnapMailbox offers key features that will complement those qualities. Not everyone starts an LLC with a physical commercial space available. You might even be starting it out of your home.
There’s nothing wrong with humble beginnings, but they might result in unforeseen complications such as being forced to use your residential address in important documents that are publically accessible and possible problems receiving important mail.
A virtual mailbox linked to a physical business address alleviates these complications and offers many more advantages to a young business. Our business address service gives you a choice between addresses nationwide that can be used for important documentation and protecting your privacy. Additionally, our virtual mailboxes ensure that you never miss any important mail and that all of your critical business mail gets scanned and sent to you in one convenient digital location.
With a virtual mailbox on your side from the start of your LLC’s journey, you can rest assured that you’ve set yourself up for success early.