Limited Liability Companies, or LLC’s, are a popular option for U.S. Citizens and foreign nationals looking to start a business enterprise. The business structure allows the owners to have limited personal liability for the debts and actions of the company while enjoying flexible management structures and pass-through taxation.
Before starting your own LLC, here are some things you might want to consider:
Weigh the pros and cons. While there are considerable advantages to operating as an LLC, there are also disadvantages you may wish to consider. For example, single member LLCs offer the advantage of not requiring a separate tax return but they may not offer as much protection against liability.
In most cases, active participants in an LLC must report their share of LLC earnings as income from self-employment, and are subject to FICA and medicare taxes. Be sure to research the best options for your business enterprise prior to beginning the start up process.
Know the state laws. The process and requirements for forming an LLC vary from state to state. State law will determine the type of business you can create as an LLC, the documentation you must provide, the licenses and permits you are required to obtain, the filing fee you must pay and can even set limitations on what you may name your new company. Check with the state’s department of revenue office for more information regarding that state’s requirements.
Know the process. While creating an LLC is generally simple, knowing the steps you must take in the process will help avoid mistakes. In most states, the process is as follows:
- Choose a name for your new business. Be sure that the name is not already in use and complies with all state guidelines.
- Determine the structure of your company. The management structure (member-managed or board-managed) and number of members may affect the types of documentation you must provide.
- Complete the necessary paperwork, including the articles of organization, as well as any additional documentation required by state law.
- File your paperwork and pay the state’s set filing fee.
- Generate an operating agreement, outlining the responsibilities and protections of the LLC members. This is where many “do-it-yourselfers” fall short; an LLC without a valid operating agreement is not a fully-formed entity.
State law may mandate additional steps be taken prior to completing the process. Again, check with your state’s relevant government offices to determine what, if any, added steps are need.
Consult an attorney. An attorney’s counsel is the safest way to ensure that you have met all the requirements to forming your LLC and may help avoid problems in the future. Be sure that the attorney is well-versed in the tax options available to an LLC under IRS regulations. If an LLC is not your best option, an attorney may also help you identify a more appropriate path for your business, such as a partnership or incorporation.