How Do I Set Up an LLC for My Business?
You have a brilliant business idea, and you’re ready to test the entrepreneurial waters. You’ve researched the market and validated key business assumptions (e.g., what problem are you solving and who are you solving this problem for?). You’ve spent time investigating what similar products are out there and maybe even developed a prototype to show your prospective customers.
Now you’re faced with one of your first big questions: “Should I start a Limited Liability Company (LLC)?”
Structuring your business is a major decision for every entrepreneur. Perhaps you’ve been operating as a sole proprietorship and are looking to take that next big step. Or you might be determined to start your venture as an LLC.
Whatever your situation, let’s review some of the important considerations to keep in mind before launching full-on into the world of an LLC. After all, strategy is vital in the management of any successful business. So take your time to think about whether starting an LLC is the best move for you right now.
What is an LLC?
LLC is an abbreviation for limited liability company. It’s a business structure that provides a business with limited liability (similar to a corporation), but the structure is easier to establish and maintain.
Don’t make the mistake of thinking a one-person business isn’t still a business. Even freelancers and consultants take on substantial risks in their work. One way to mitigate that personal risk is to set up an LLC. This is a legal designation that separates your business funds from your personal funds. If you get sued, they can take your profits, but not your home.
Pass-through treatment of income taxes
Unlike a corporation, an LLC is not viewed as a distinct entity for income tax purposes. The owner(s) of the LLC report their operating results, including profit or loss, on their personal income tax returns, the same as they would as either a sole proprietorship or partnership. No return is filed explicitly for the LLC.
Finally, keep in mind that you may need to access several different types of forms to properly and legally run your business. Fortunately, documents like waivers, employment agreements, and purchase agreements are available online.
What Are the Different Types of LLCs?
There are several different business structures you can choose from when forming an LLC that will affect how your business is protected; it can even affect your local and federal tax rates. You should consider the pros and cons when choosing the type of LLC that best suits your needs. The most common LLCs types are:
Single-Member LLC/Sole Proprietorship
As the name suggests, a single-member LLC has one owner. This is similar to a sole proprietorship in that the owner is personally responsible for:
- Business transactions
- Business debts
If a single-member LLC does not become a corporation, it is classified as a “disregarded entity” and taxed as a sole proprietorship. Alternatively, LLCs can be taxed as a corporation.
Single-member is the most popular the most affordable LLC formation. There is also significantly less paperwork required.
General Partnership/Multiple-member LLC
When multiple members form an LLC, a general partnership is the preferred legal structure. Here, all owners take responsibility for business transactions, debts, and taxes. Each member can also decide when assets are sold and pay taxes on their share of income from the business.
The LLC is beneficial for small- and medium-sized businesses. General partnerships and limited partnerships are similar in that multiple people share responsibilities. However, a significant difference is that a single member maintains total liability. It also leaves one member to keep the least liability.
Member-managed LLC or Manager-managed LLC
When forming an LLC, you set up your desired structure in the operating agreement and choose the option of member-managed or manager-managed LLC.
The owners of the company run a member-managed LLC, and it’s the simplest structure. Every owner has the authority to act on behalf of the business.
A manager-managed LLC is when the member (or members) of an LLC delegate managing the LLC to another person who is not a member. It is commonly used when there are passive members of the LLC, like investors.
Steps to Form an LLC
Here are seven steps to take to start a limited liability company (LLC) in any state. For information on forming an LLC in your state, check out the 50-State Guide to Forming an LLC.
- Choose a name for your LLC that complies with your state’s rules (most states require that your LLC’s name end with an LLC designator).
- File Articles of Organization with your state’s corporate filing office (often the Secretary of State).
- Choose a registered agent, an individual or company, that agrees to accept legal papers on behalf of the LLC if it is sued.
- Decide on member vs. manager management.
- Create an LLC operating agreement (an internal document that establishes how you will run your LLC, including how it will be managed).
- Comply with other tax and regulatory requirements, including EIN, business licenses, and sales and employer taxes.
- Out-of-state LLC registration is required if you plan to do business in a state other than the state where you formed your LLC.
At Cobalt, we want to prepare you for the many business decisions you’ll have to make and the challenges you’ll face, including the legal structure you choose. Our idea development software will guide you through the development process and in the proper order of operations. If you have any questions about whether you should set up an LLC for your business or how to do so, get an invite and kick-start your business growth strategy today!