Basic Overview of Forming a Limited Liability Company

When you go into business for yourself, you have several options when it comes to the type of business structure you choose to operate under. You might be a sole proprietor, partnership, limited liability company, or corporation. Which you choose will affect factors such taxes, liability, and required paperwork.

If you are considering a limited liability company (LLC), here’s what you need to know about this option and five things you’ll need to do to form your company.

Background on Limited Liability Company 

The benefits of creating an LLC typically outweigh any perceived disadvantages and are generally unavailable to sole proprietorship’s and general partnerships.

Protected assets

LLCs provide limited liability protection to their owners (members), who are typically not personally responsible for the business debts and liabilities of the LLC. Creditors cannot pursue the personal assets (house, savings accounts, etc.) of the owners to pay business debts. Conversely, in a sole proprietorship or general partnership, owners and the business are legally considered the same—leaving personal assets vulnerable.

Pass-through taxation

LLCs typically do not pay taxes at the business level. Any business income or loss is “passed-through” to owners and reported on their personal income tax returns. Any tax due is paid at the individual level.

Increased credibility

Forming an LLC may help a new business establish credibility with potential customers, employees, vendors, and partners because they see you have made a formal commitment to your business.

Limited compliance requirements

LLCs face fewer state-imposed annual requirements and ongoing formalities than S corporations and C corporations.

Flexible management structure

LLCs are free to establish any organizational structure agreed upon by the company owners. LLCs can be managed by the owners (members) or by managers, unlike corporations which have a board of directors who oversee the major business decisions of the company and officers who manage the day-to-day affairs.

Few restrictions

There are few restrictions on who can be an LLC owner or how many owners an LLC may have (unlike S corporations).

Either way, you’re taxed on your share of the profits as part of your personal tax return (Schedule E).

Under an LLC, you are self-employed and aren’t subject to tax withholding. Therefore, you must pay estimated taxes and self-employment taxes quarterly. However, an owner not actively involved in the LLC may be exempt from paying self-employment taxes. Talk to your accountant.

As a small business owner, you must assess, collect, and submit sales tax to the appropriate state authorities. Also, you must pay state taxes (if applicable in your state) through your individual tax return.

Forming a Limited Liability Company

Each state has its guidelines on the steps you need to take to form an LLC. However, here are five things you’ll need according to the Small Business Administration:

Business Name

Choose one that doesn’t currently exist in the state, include LLC in the title, and avoid restricted words, such as ‘bank.’

Articles of Organization

This includes information such as your business name, address, and the names of members.

Operating Agreement

This is not required in many states; however, it is a good tool for structuring multi-member operations.

Licenses and Permits

Find out what federal, state, and local business licenses and permits you need based on industry, state, and locality.

Employees

There are a variety of good sources to help you learn what you need to know about hiring staff, such as your state Chamber of Commerce, Society of Human Resources Management (SHRM), and the Small Business Administration.

Additionally, some states require new businesses to publish a statement in the local paper about their LLC formation. Check with your state small business development center.