A Quick Guide To LLC Ownership Structure

A Limited Liability Company (LLC) is a legal form of business that protects its owners from personal responsibility. It’s a hybrid business structure that combines the positive attributes of a partnership, sole proprietorship, and corporation. That includes tax advantages, limited personal liability as it’s a legally separate entity from its owners, easy profit distribution, and management flexibility.

Notably, the LLC business structure has become a popular choice for many business owners because it’s easy to set up and manage and offers more flexibility. On the whole, it’s a simple and adaptable form of business. Therefore, if you’re looking to structure your business as an LLC, this is a comprehensive guide to help you.

Steps To Form An LLC

How do you start an LLC? While formation laws vary from state to state, the following are the basic steps to set up an LLC:

1. Choose A Business Name

Before registration, you must first choose a unique LLC name for your business. Here are the general guidelines for naming an LLC:

• The name should include the phrase “limited liability company” or the abbreviation “LLC”.
• It should be different from the names of existing businesses or state agencies like the Treasury, FBI, or State Department, so it won’t confuse the public.
• You must get a license to add restricted words such as bank, attorney, doctor, or credit union.

Also, selecting an LLC name with an available URL is best, especially if you want to develop a business website. You can check online if the name is available as a domain name.

2. Appoint A Registered Agent

A registered agent is an individual or business entrusted with the obligation to send and receive vital official documents on behalf of your business. These may include tax forms, legal documents, or government correspondence forms. The agent can be an individual or a business entity with a physical street address and officially registered as an agent for service of process. For an individual, the agent must be over 18 and should be a full-time resident of your state of incorporation.

3. File Articles Of Organization

The Articles of Organization is the official document required to form an LLC. You must file a Certificate of Formation to register your LLC successfully. Here are the details needed:

• Your LLC name
• Principal business address
• The name and address of your registered agent
• The date of LLC formation
• LLC’s management structure can be member-managed or manager-managed. In a member-managed LLC, owners control the day-day business operations. On the other hand, a manager-managed LLC assigns management tasks to a professional manager appointed by the members.
• Names and addresses of LLC members
• Name and address of LLC manager if manager-managed
• The period over which the LLC will exist. It’s usually indicated as “Perpetual” unless you intend to end business operations at a specified date.

Upon completion, the secretary of state will review your file and approve your LLC as a legal business entity if everything is in order. Most importantly, note that other states may have additional requirements for filing. So, check with your Secretary of State for all LLC filing regulations.

4. Create LLC Operating Agreement

In most states, an operating agreement isn’t essential during formation. Even so, it’s a highly recommended document for LLC owners. It outlines vital aspects of your business, including ownership and operating procedures. Below are some details the agreement can elaborate on:

• Powers and Duties of Owners and Managers
• The criteria for profit distribution
• Buyout rules

In that case, owners and other stakeholders understand the rules that govern business relationships. Without an operating agreement, default LLCs laws apply, which may not offer you the optimal protection you require.

5. Obtain Employer Identification Number (EIN)

Employer Identification Number (EIN) is a social security number the Internal Revenue Service (IRS) gives to businesses. It enables the IRS to keep track of your company’s tax status. Also, you’ll require an EIN to:

• Open a business bank account
• Employ workers
• File state and federal taxes

Luckily EIN is provided to business owners free of charge. You can apply for it online or by mail.

6. Open A Business Bank Account

Opening a business bank account lets you separate personal property from business assets. This protects your personal assets from potential risks such as business lawsuits. You can also obtain a business credit card to easily track your company expenses and build your business credit score.

Pros Of An LLC

Here are some advantages of an LLC:

• It offers limited liability. Members aren’t held liable for business liabilities like debts. So, this safeguards your private assets from potential lawsuits.
• It’s easy to form since the procedures and paperwork required during formation are relatively light.
• It provides tax advantages. By choosing to be taxed as pass-through entities, LLCs can avoid double taxation that C corps are subject to.

Additionally, an LLC allows an unlimited number of members. Any entity or individual can be an owner except insurance companies and banks.

Cons Of An LLC

Like any other business structure, an LLC also has its disadvantages. Firstly, it costs more to form and maintain than a sole proprietorship. Some high expenses you’ll incur include formation fees, annual report fees, and franchise taxes.

Additionally, an LLC may attract fewer investors. Many investors usually prefer to put their money into a corporation rather than an LLC, especially if the LLC is taxed as a partnership. The pass-through form of taxation complicates an investor’s personal tax situation. They may have to pay taxes on LLC’s profits even when there’s no cash distributed for tax purposes.

Conclusion

An LLC is one of the most flexible and easy-to-form business structures. Also, it offers members limited liability and tax advantages. The above is a detailed guide to LLC ownership structure. Most importantly, remember the legal process of establishing an LLC differs by state. So, confirming the applicable laws in your state is crucial before forming an LLC.