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Written By: Kevin Gardner
A limited liability company is a common structure for startup businesses that provides limited liability protection for the personal assets of the business owner or owners.
If you are starting an LLC, these are eight things you should know about it:
1. Fill Out the Right Tax Forms
One of the benefits of forming an LLC is the flexibility provided for tax classification purposes. Single-owner LLCs are taxed as a sole proprietor by default, while LLCs with multiple owners are taxed as partnerships. However, there can be tax benefits to having your LLC classified as a C-corporation. If you elect to go that route, you will need to fill out form 8832.
2. Choose the Right State To Organize Your LLC
Many businesses choose to form in Delaware, because of favorable state laws. However, most LLCs should form in the state where they will operate, because it is less complex and the fees are less expensive. If you plan to do business in more than one state, you may need to register in all of the states where you will do business.
3. Name Your LLC
There are a few rules to keep in mind when choosing the name for your LLC. Usually, the name will need to end in "LLC," "Limited Liability Company" or some other permitted variation. The name needs to be unique enough to distinguish it from all other active domestic and foreign LLCs filed with the Secretary of State. Some terms, such as bank or trustee, may not be permitted by state law.
To avoid implying your business is a corporation, the name can not contain the words "corporation," "inc.," "incorporated" or "corp." You can not pick a name that someone else has already trademarked. If you decide to use a name other than your legal LLC name, you will need to file a "fictitious business name" statement or "doing business statement."
4. Be Aware of the Effects on Raising Money
You may have difficulty raising money from venture capital firms and other investors because they usually prefer to invest in corporations, rather than LLCs. If you will be issuing LLC units to investors, you will need legal assistance to ensure you comply with state securities laws. You must make sure your investors are informed about the risks of their investment. Your LLC's Articles of Organization or investor rights agreement must clearly state the rights of investors.
5. Obtain an Employer Identification Number
You will need an Employer Identification Number to hire employees or open a business bank account. You can apply for an EIN online through the IRS website.
6. Open an LLC Bank Account
It is important to keep your business finances separate from your personal finances. To do this, you should open a bank account in your LLC's name. The bank will need to see your filed Articles of Organization, EIN and may request resolutions of the LLC authorizing the opening of the account. You must assign who has signing authority for your business and whether multiple signatures will be required for large checks.
7. File Your Annual Reports
Most states require LLCs to file reports annually. Missing the filing deadlines or failing to file the required reports can result in penalties, late fees, suspension or dissolution of your LLC. If you are doing business in more than one state, you may need to meet separate filing requirements in all of the states.
8. Create an LLC Membership Ledger
An LLC Membership Ledger contains the names and addresses of the LLC owners, what class of and how many units they hold and when they acquired the units. It also contains records of the transfer of units by parties and dates of transfer. Be sure to keep this ledger up to date.
If you are considering forming an LLC it is important to educate yourself about the rules and requirements involved. A business attorney or tax professional in your area can assist.