LLCs are a hybrid business type that offer personal liability protection while allowing business owners to operate in a tax-flexible manner. Creating an llc isn't as complicated as you might think.
To form an LLC, you need to file articles of organization with your state. These documents outline the basic information of your company and include a registered agent's name and address.
Articles of organization
An important part of establishing a limited liability company (LLC) is filing articles of organization. These documents establish the legal existence of the business and give members specific rights and powers.
Most states provide a form for these documents, but the requirements vary by state. It is always a good idea to consult an attorney for assistance.
Articles of organization should include the name of the LLC, its purpose, address and start date. It should also list the members and managers.
Some states require that you also include initial capital contributions, which are the cash or assets that members “buy in” to the LLC.
Depending on the state, you may need to include a registered agent, which is a person or service that is authorized to receive legal paperwork for the LLC. This should be a member of the LLC, a law firm or lawyer, or a family member.
Operating Agreement
The operating agreement is one of the most important documents that every LLC needs. This document is the key to ensuring your business operates like a legitimate company, which means it will protect you from liability.
The agreement will address many issues, including management, voting, membership rights and allocation of profits and losses. It will also explain how the LLC is managed and when members can transfer or withdraw their ownership interests.
It will also describe how the business pays taxes and how members are paid compensation for their work within the company. It will also outline the procedures for changing the tax classification of an LLC.
If you have a complicated situation, such as foreign transactions or members that are already separate business entities, hiring a business attorney to draft the agreement can be a smart move. They can write it up for you for a flat fee and make sure that all the clauses you need are included.
Registered agent
Every business entity that is formed under state law, including LLCs and corporations, must appoint and maintain a registered agent in the state where it was formed. Failing to do so can result in penalties and disciplinary actions against the entity.
A registered agent provides a physical office address for the entity and receives all legal, tax and official correspondence from the state. They also accept service of process, which is the delivery of documents such as summonses, subpoenas and lawsuits filed against a business entity.
The agent must be available to accept these documents during normal business hours. This can be difficult to accomplish, especially if you are busy running your business and don’t have the time to stay in contact with your registered agent on a regular basis.
Unless you are a large corporation, it may make more sense to hire a professional registered agent service to take care of this task for you. Not only will this save you the time and hassle of keeping up with these important legal communications, but it will also help your organization avoid fines and disciplinary action if you do not meet the required deadlines.
Taxes
If you want to run a successful business, it's important to understand the tax rules that affect your company. The amount of taxes you owe to the government depends on your company's structure and number of members, as well as the state and locality in which it operates.
In general, LLCs are treated as pass-through entities for federal income tax purposes. This means that profits are reported on Schedule C of the owners' personal tax returns.
However, some states levy an additional LLC tax based on the amount of income that an LLC makes. For example, California imposes an annual fee on LLCs that make more than $250,000 per year.
Members can also elect for their LLC to be taxed as a corporation instead of a pass-through entity. If you decide to do this, it's best to discuss the potential benefits with your CPA or tax professional.
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