Setting up an LLC in Your Home State is Easy
Limited Liability Company or LLC is relatively a new form of business entity. All the 50 states have passed resolutions to accept LLC’s as a valid legal entity. Rules and regulations for forming LLC vary in each state. Setting up an LLC in your state must be done in accordance with your state laws. Refer to your to state agency dealing with LLC registrations to get the exact details and formalities to form LLC.
Setting up an LLC in your home state is easy and simple as is in most states. All states provide online resources on the formalities and procedures required for setting up an LLC. Generally business registrations are handled by the Secretary of State or Corporations Commissioner’s offices. In some states it is the revenue division that handles the process. These agencies provide detailed instructions in setting up an LLC. You may have to consult a lawyer to draft your LLC operating agreement if your state laws stipulate filing the same for a valid registration.
Some of the basic steps and requirement in forming an LLC are:
LLC Name
You need a name to register your LLC in your state. It should be a valid name and must end with ‘Limited Liability Company’ or ‘LLC’ or a derivative which clearly states the limited liability status of the company. The name cannot be identical or closely similar to that of an existing business. Some states do have a name availability check option with their registration process.
Articles of Organization
This is called a Certificate of Organization in some states. To obtain a valid registration for your LLC you have to file an Articles or Certificate of Organization with the state and pay the required fee. This is a basic requirement with all states. All states indicate the information needed in the Articles in a pre-printed form or through instructions. You have to carefully understand the requirements, complete the form and sign it as the organizer.
Operating Agreement
Some state laws stipulate that the LLC operating agreement be filed along with articles for a valid registration. Anyhow, an operating agreement is crucial in the existence of an LLC. The most important fact is that it will provide individuality to the LLC.
Registered Agent
The LLC requires a local person or entity to act as its registered agent. The Articles or Certificate must contain the agent’s name and local address and the persons consent to act as the registered agent.
Public Notification
Some states require that a public notice be issued regarding the intent of forming the LLC with the proposed name.
As the requirements vary with each state, it is advisable to refer to your states regulations to form LLC.
Business Ownership Basics
The basic of any business ownership is the legal structure of your business. All business should have a separate identity and existence from the business owners for obvious reasons. The cardinal principle of business is earning profit. To know whether your business is profitable you have to keep it separate from your personal life. Your business can assume different structures suitable for the type of business you operate. If you are running a small business as a paying hobby and does not involve any risky transactions, you may assume the structure of a sole proprietorship. It provides you with all the flexibility you need and does not involve many legal formalities in its operation. You have the ease of reporting the income from business and payment of any tax in your personal tax returns.
If two or more persons are jointly operating a small business enterprise without potential business liabilities, a general partnership is ideal. Like that of a sole proprietorship, a general partnership is also easy to form and operate. The income from business can be reported through the partner’s tax returns. You may have to file an information return on the business activities apart from that of your tax returns.
The issue with the business structures cited above is that the business owner’s personal liability is unlimited. Any liability or debts arising from the business is the proprietors or partners responsibility and their personal property is open to appropriation to settle business debts. The solution to this is by setting up a business structure that limits business owner’s personal liability to business obligations. Corporations and Limited Liability Companies are designed to just that.
If you are operating a small business that involves considerable business risks and has potential for future liabilities, form a llc. As business structure formation is governed by state statutes, you will have to check with the government agency handling business registrations for setting up an llc in your state. Starting an llc is relatively simple and straight forward. You have to file an Articles of Organization with the state agency and pay filing fees. It is as simple as that. The Articles will contain all the basic information about your llc. Most states have the Articles in a standard form with instructions on how to fill the form. Another important item is an llc operating agreement. You have to prepare and adopt an operating agreement for your llc stating its organizational structure and functionalities. In some states this is a mandatory requirement for starting an llc.
Liability Protection with Limited Liability Companies and Corporations
Liability is part of any business. Even if you are operating a business with your own resources and cash, there are many potential liabilities that may arise at any point of time. If your personal assets are not adequately protected, you stand to lose all your hard earned money due to a minor error or omission. State statutes have business structures that enable you to adequately protect your personal property but still provide you with enough flexibility to manage your business.
Corporations and Limited Liability Companies are two options for limiting your personal liability and protecting your personal assets. Limited liability partnerships are also a business structure that can limit personal liability of business owners but is restricted to specific businesses or professions in many states. The owners of these business structures have limited personal liability in business obligations. Limited Liability Companies are often incorrectly termed limited liability corporations or LLC Corp. LLC is an unincorporated entity but shares the limited liability characteristic with a corporation. LLC has the flexibility of operations as that of a partnership or sole proprietorship without the burden of unlimited personal liability of these business forms.
LLC’s are easy to form and convenient to operate. LLC business can start with filing an Articles of Organization with the state agency that deals with business registrations and paying the filing fees. It is prudent to have an LLC operating agreement in place. The llc operating agreement will portray individual existence and provide visibility to the limited liability status of the company. The owners of the LLC (called members) have the flexibility of partners of a general partnership in the management of the business while their personal liability is limited as that of share holders in a corporation. The members of the LLC can elect to be taxed as any other business entity like a partnership or corporation according to their convenience.
In LLC vs. corporation, the standard C corporations are subject corporate income tax and when the profits are distributed to the shareholders, they in turn have to report the income in their personal tax returns and pay tax if applicable. In LLC vs S Corporation, both have pass through taxation similar to that of a partnership and the members report the income in personal tax returns. This can avoid the double taxation involved in a C corporation. However, in all business entities, employment taxes or license fees are payable, if any are applicable to them.
Setting it up Right With a Limited Liability Company
Legal business structures are important in managing your business. Your business needs an identity and a separate existence from that of your person. Even if you are conducting business as a Sole Proprietorship, it is advisable to keep the business transactions separate from your personal life. When your business involves considerable transactions, the attendant risks are proportionate. To protect your personal assets from any risk arising from your business you can form llc or Limited Liability Company which limits business owner’s personal liability to business debts and obligations.
LLC formation is not too complicated and can be easily achieved. Limited Liability Companies are allowed by all the fifty state laws. Each state may have different regulations regarding LLC formation and you should consult your states agency which handles LLC formations. Generally this is handled by the Secretary of State’s office. For setting up an LLC, there are some basic actions to be taken. First you have to choose a name for your business. Care should be taken to choose a name that is not identical or closely similar to that of an existing business in the state. You can consult the Secretary’s office and check the availability of the name you have chosen. Then file an Articles of Organization with your Secretary of State’s office. You are required to pay a fee for filing the Articles and some states charge an annual fee or minimum tax until a Certificate of Cancellation is filed for dissolving the LLC.
The next step is drafting and adopting an llc Operating Agreement. Some states stipulate filing of an operating agreement along with the Articles. Even if you are a single member llc, it is advisable to adopt an Operating Agreement which will provide individuality or a separate existence to the LLC and protect your limited personal liability status. In a multi member llc, the operating agreement is imperative for the smooth functioning of the company. The operating agreement is between the members which should clearly state the rights and responsibilities of each member. The operating agreement will help override some of the default provisions in state statutes that may not be reasonable to your llc members. The operating agreement can include each member’s share of interest and profit, voting rights, operational rights and duties, organizational rules and regulations, divestment in the LLC, voluntary dissolution or when a member becomes disabled or deceased.
Easy Steps to LLC Formation
Formalities and procedures for Limited Liability Company or llc formation is determined by the state in which the LLC is registered. Most states have simple and straight forward requirements for setting up llc. Below is a basic list of requirements to form an llc. Please remember that the requirements may vary from state to state and the type of business you plan to conduct.
Business name
Your LLC has to have a business name to conduct business with the public. It is not necessary that the name you have chosen will be awarded to you. By registering under a name that is already in use or identical to a registered name is asking for trouble. You may get sued under the Trademarks or Intellectual Property laws and end up paying damages. There are no foolproof ways to check name availability. Some states provide name availability checks free of charge or for a nominal fee. All names should end with the Limited Liability Company or the more popular abbreviation “LLC”. Certain prohibited words such as Insurance, Corporation or Bank cannot be included in the LLC name. This again varies from state to state.
Registration
Once you have established a probable name for your business, you have to file the required paper work with the state agency handling LLC formation. Usually this is handled by a department in office of the Secretary of State. An Articles of Organization stating important details about your business and organization need to be filed along with necessary forms and the fees for registration is to be paid. Some states require an llc operating agreement to be filed along with the application for LLC registration. Some states stipulate that a public notice should be given about the formation of the LLC.
Registered Agent
You are required to designate a person as the LLC’s registered agent and provide that person’s/entities name and address to the state. That person or entity will act on the LLC’s behalf for all legal or statutory engagements and compliance.
Articles of Organization
This is the llc’s charter to operate its business in the state. The articles of organization should describe the basic purposes for which the entity was formed and significant information regarding the members and office bearers if any of the LLC.
LLC Operating agreement
This document is essentially drawn to have clarity in the structure and operations of the LLC. If the LLC has more than one member it could also state the working relationship of each member, their rights and duties, profit/loss sharing ratio etc.
Hobby or Business? LLC or Not?
Do hobbyists really need to form LLC ‘s or Corporations? That’s a great question and the answer to that question is always a resounding maybe! It really depends on the goals of the one who is doing the hobby. Are they currently making money? Do they want to eventually make money? Could their hobby cause financial or other types of losses to spectators, customers, etc? All of these questions will give answers that point you (the hobbyist) to an LLC, a Corporation or neither.
Let’s take some examples of hobby’s that might require an entity, or rather I should say, that might benefit from having and LLC or corporation setup.
- 1. Bloggers. This group is growing like crazy every day and although there are a lot of them that just want to “express” themselves online, there are handful of them that would actually like to make money. Those who have a goal to make money should form and LLC and create an LLC operating agreement to govern their business because at this point it clearly is a business and not just a hobby.
- 2. Real Estate Investor. TO ALL REAL ESTATE GURUS: you should really learn how to incorporate yourself. Either inc. yourself or create an LLC. Either way is relatively easy and can be done by either filing articles of incorporation or articles of organization with your state. Most states will provide a template version on the LLC form that you can download from the web. If you can’t find one, just Google it.
- 3. Tax Preparers. Every neighborhood has the tax expert that preps taxes for everyone each January through April. He starts doing it when he returns from his 8-5 job and works all evening. Why does he do it? Because he loves it. Really? I think he does it to make some extra money and whether he admits it or not, he is a business owner (a part-time business owner) but a business owner in every sense of the word. Does he need an entity? Absolutely.
I know that there are literally hundreds of different groups of hobbyist that could benefit from setting up a legal entity that separates them from their business (hobby). In regards to bloggers, I don’t think that it would take much effort to find cases where slander has taken place on someone’s blog and legal action has been the end result. No one wants to be caught in the middle of a legal battle but if you do end up there, it would be nice to have the liability protection that an LLC or Corp offers.
Operating Agreements 101
The LLC operating agreement is something that all LLCs need to have on record because the LLC operating agreement is what is used to structure your financial relationships for your business, it also structures the working relationships that you have with the other members if needed. How this works is that all LLC operating agreements have to include each owner’s percentage of ownership in the LLC, his or her share of profits or losses, his or her rights and responsibilities to the business and what happens if one of the partners leaves the business.
One interesting thing to note about LLC operating agreements is that many states do not require you to have them. This means that you do not need to file an LLC operating agreement form with the state when you register your LLC. Even though in most states you are not required to have an operating agreement on file, it is still a good idea to have on for your LLC, even if it is a single member LLC. The reason for this is that the LLC operating agreement helps guard your limited liability status, but it can also prevent any financial and management misunderstandings. The LLC operating agreement also ensures that your business is run by your own rules, not the default rules that have been created by your state.
When creating a LLC operating agreement you can look on the internet for a sample LLC operating agreement. This will allow you to use the sample to create your own operating agreement. With the sample LLC operating agreement, you can simply fill in the sections that pertain to your business and omit the ones that do not apply to your business. You can also use the sample LLC operating agreement to create your own operating agreement, all you have to do is follow the LLC operating agreement example, and you are done.
Your LLC operating agreement example is going to provide you with the things that should be included in your LLC operating agreement, but it will also include things that might not pertain to your business. The biggest difference with the LLC operating agreements is going to be if you are a single member LLC or a multiple member LLC. The reason for this is that with the different number of members how you manage your LLC is going to vary. For example, with a single member LLC you are going to be the only one making any decisions, so you don’t need to go into, as much detail about the management of the LLC like you would have to if there were multiple owners.
Your LLC operating agreement is going to cover a wide range of issues, and each of these issues must be addressed in detail to make the operating agreement complete. One of the issues that needs to be addressed is the member or members’ percentage interests in the LLC. If you are the sole owner you obviously have 100% ownership in the company, but you still want to include that detail. Another important issue to address is the rules for holding meetings and taking votes during the meetings for your LLC. When more than one person owns a percentage of the business making decisions can get complicated because not everybody will agree on the same decision. Knowing ahead of time how to handle these situations can prevent any hard feelings from developing.
