If you think about it, business ideas are easy to come by. Converting them into reality and setting up a going concern is where the catch is. If you have a viable business idea and is willing to convert that into a going concern, first decide the business structure you want to adopt. A separate legal entity is necessary to conduct business as to gauge your business success. All business entities are formed under state laws. The legal structures for operating business are Sole Proprietorship, General Partnership, Limited Partnership, Limited Liability Partnership (LLP), Corporations and Limited Liability Companies (LLC).
Sole proprietorships and Partnerships are easy to form and operate. Very few statutory formalities and procedures are involved in forming and operating these business structures. The issue with proprietorship or partnership is that the business owner’s personal liability for business obligations is unlimited. This means that if the business defaults payments to creditors or lenders or is unable to meet a business obligation from its own resources, the proprietor or the partner will have to meet them personally. The business failure will affect the business owner’s personal assets.
Legal business forms that limit business owner’s personal liability are LLP, Corporations and LLCs. LLP’s are restricted to certain professions and class of business owners. Corporations and LLC’s are the popular business entities. Corporations involve lot of formalities and procedures to form and operate and are comparatively the most expensive form of business entity. Limited Liability Company formation is relatively simple and inexpensive. Setting up LLC can be accomplished on your own without much trouble. As the rules and regulation to form LLC varies in each state, you may check with the state department handling business registration to understand the procedures involved in limited liability company formation in the state you choose to start LLC.
To form LLC, you have to furnish information regarding the purpose of setting up LLC and its organization. Most states require an Articles of Organization containing all essential information to be filed with the state department handling business registrations. Usually the article is available in a pre-printed format with the department which the LLC incorporator has to fill in, sign and submit. You have to pay a fee for filing the Articles. After the registration of your LLC you have to get all the required business licenses and permits for conducting business in your state. If wish to employ persons in your business you have to comply with the Federal and State employment regulations.
Choosing an appropriate business structure is important for many reasons. The business structure should provide flexibility in operations and limit personal liability as well. Limited Liability Companies or LLC’s are best suited for small business operations that demand flexibility in operations. LLC’s limits the personal liability of business owners like in a Corporation but offers flexibility in management as that of a general partnership or sole proprietorship. Corporations are comparatively expensive to form and operate and the procedures and formalities in its operation are quite cumbersome. Partnership and sole proprietorship offers flexibility but the proprietors and partners have unlimited liability in the business. A proprietor or partner is wholly responsible for all business transactions and obligations and their personal assets have no protection from business defaults. LLC’s provides advantage of limited personal liability and flexibility of operations.
How to form an llc depend on the state statute where you wish to register your llc. Formalities and procedures for forming an llc and operating it may vary in each state. Usually the business registrations are dealt with by the Secretary of State or Corporations commissioner’s office. Check with your state’s agency dealing with llc registrations to get proper understanding on how to form an llc. Forming llc is not difficult and does not involve many formalities so that you have to consult a professional or a lawyer. You can do it yourself if you apply some brains and effort. The general formalities and procedures for forming llc are easy and not too complicated. All states are out to attract business to their territory and will be most helpful in registering your llc.
The basic requirement in forming an llc in most states is to file an Articles of Organisation. The document will contain all the essential information regarding your proposed business. You have to select a name for your llc which is not identical or similar to that of an existing business. All states maintain a business or corporations register which you can check to ensure that the name you selected is not already in use. The name should contain the words Limited Liability Company or an abbreviation that clearly demonstrates the limited liability status of the business. The Articles of Organisation is usually available in a pre-printed format with blanks for required information. You fill in the blanks, sign as the organizer, pay the filing fees and your llc is in business. An operating agreement is advisable even if you are a single member llc. The operating agreement will provide individuality to the llc and clearly state its limited liability status.
Starting a business as a Limited Liability Company in the United States is easy and convenient as the procedures involved are minimal and straightforward in their content. Limited Liability Companies or llc’s are the most suitable for small business entrepreneurs as they have the advantage of limited liability for the debts and action of the LLC as in a Corporation but with flexibility in management and pass through taxation.
Setting up llc depends on the statute of your state of domicile. Most states do not restrict ownership and an llc can be owned by a single or several individuals, other llc’s, corporations and even foreign entities. Though, business like banks, insurance companies or non-profit organizations generally cannot be set up as llc’s.
To form llc, the legal requirements and regulations of the state in which the llc is to be set up need to be complied with. Each state may have its own rules and regulations regarding the formation of Limited Liability Companies. The owners of an llc are termed as members rather than partners or share holders.
There are certain llc forms and documents for starting up a business in every state. The basic documents are an Operating agreement and Articles of Organization. The operating agreement is drawn up by the members which sets forth the functions of the business, members interest or investments, voting rights, profit/loss sharing ratio, management policies, rights and duties of members and the dissolution or termination conditions. Articles of Organization are the basic charter for your business to engage in a lawful business activity in the state of registration. It should contain all basic information about your business including but not limited to Name and principal place of business, nature of business, registered agent’s name and address, name and addresses of the principal officers and the know members of the entity. Some states term this as Certificate of Organization also.
Limited Liability Companies are not recognized as a classification for tax purposes. Llc taxation must be done as a recognized federal tax entity as that of a corporation, partnership or sole proprietorship. Members can elect to be taxed as any one of the recognized tax classifications by filing a form 8832 with the federal government. Llc taxation filing includes wage and tax statement (w-2, W-3) and Forms 941 to 944 if it has paid employees and 1040, 1065 or 1020 for profit or loss from business in accordance with the classification the business has elected to be taxed.
To Form LLC ‘s you just have to follow a few simple steps.
- Name Availability. The first thing that you’re going to want to do, so you don’t waste time with paperwork that doesn’t pan out, is check with the Secretary of State, in the state where your business is located, to make sure that someone else has not already taken your proposed business name. Most states give you an easy-to-use name search feature on their government site. I’ve come up with names that were so off-the-wall creative that I know where of my own creation (at least I thought) and then I’d check the state’s website and find out that they were already registered by someone else. No one wants to go through all the hassle of creating the LLC form or documentations for one business name and then realize after the fact that it’s taken. Step one should be to check the availability of the name that you’d like to use for your new business LLC.
- Articles of Organization. After you have verified with the state that your desired name is available for your Limited Liability Company, you’ll have to complete a very short form called articles of organization. Most states will accept this on one sheet of paper. You can usually find a sample form on your state’s website otherwise, just do a quick search online for “articles of organization templates”. Completing this portion of the limited liability formation process shouldn’t take you very long, especially if you are mirroring another entity that has already been formed; it is just a matter of changing names and addresses. After you are done preparing the articles then you’ll need to file them with your state and get their stamp of approval. This stamp will have a date, which is your official organization date and becomes very important if you ever need to prove the age of your entity.
- EIN. When you have completed your name search and gotten your state to date stamp your articles of organization, then you are ready to apply for your Employer Identification Number (EIN). An employer identification number is to a business, what a social security number is to a person. It’s simply an ID that the government uses to keep track of your business. Since each state might have several businesses with similar names, the federal government has to use numbers (that are not duplicated) in order to distinguish one business from another. Your EIN can be applied for online at IRS.gov. The application only takes 10 minutes and the number can be issued to you at the end of the application process. You will use this number for vendors, LLC taxation, banking and a host of other reason.
