If you’re starting a new business you’ve probably thought about forming a limited liability company (commonly called an LLC). But do you know why you should or how to do it? If not, this post is for you.
WHAT IS AN LLC?
An LLC is a business structure recognized in every state in the country. The structure is very similar to the corporate structure in that it exists separate from its owners–this means it can sign contracts, own property, sue and be sued, have multiple owners, and more.
Because it exists separately from its owners, the owners enjoy “limited liability” for the debts and liabilities of the company. That means the LLC’s owners are not personally liable for the debts and obligations of the company. Thus, if someone obtains a judgement against the company, the LLC (and not its owners) will be required to pay the damages. (Note that there are exceptions to this and in some cases the owners can be personally liable. Most notably in situations involving “piercing the corporate veil” due to fraud.)
However, there are many differences between corporations and LLCs. First, LLCs generally have less formalities. Depending on your state, you may not have to hold annual meetings or file annual reports, you likely don’t need a board of directors, and even officers are optional. Second, LLCs can choose how they want to be taxed. Most are taxed as a sole proprietor (if it just has one owner) or as a partnership (if it has more than one owner). You can read more about business taxation in this post.
WHY ENTREPRENEURS MIGHT WANT TO FORM AN LLC
There are lots of reasons why you might want to create an LLC. Here are a few of them:
- If you have other people working for you, an LLC can help to protect your personal assets.
- An LLC can make you look larger than a one-man shop.
- If you want to add co-owners later, it is often smart to form an LLC now.
- Using an LLC can help your clients avoid the IRS classifying you as an employee.
- In certain situations, an LLC can help you save money on taxes.
CREATING A BUSINESS PLAN: HOW TO FORM YOUR LLC
Once you’ve decided that forming an LLC is the right move for your new business, here’s how you’ll do it (note that it is often best to work with an attorney to do this, but you can usually do it on your own if you wish).
First, you’ll file Articles of Organization with your state’s Secretary of State. This is kind of like your company’s birth certificate. It will include your name and a host of other organizational information such as your company’s purpose and duration. Keep in mind that your name must be unique–it cannot be identical to another registered business name in your state. Also, you’ll need to designate a Registered Agent. In short, this is the place where official mail and lawsuits can be mailed.
Second you should draft and sign an Operating Agreement. This document sets out the rules and procedures which will govern your LLC. For single-owner LLCs, this might just be a few pages. For multi-owner LLCs, your Operating Agreement will likely be 10-20 pages (or longer) and will likely cover things such as voting rights, economic rights, transfer restrictions, tax obligations, and more.
WHAT’S YOUR NEXT MOVE?
Before jumping in and forming your LLC, you might consider all the various steps involved with starting your new business. You can also register for the free Kauffman FastTrac program to learn more about the process and to learn more about creating a successful business plan.
Contributor: Chris Brown, Founder, Venture Legal