Before you consider forming an LLC there are certain caveats, tax implications, and other factors you should know. Read on to find out how to start an LLC and retire early.
How to Start an LLC: 7 Steps
If you’re a small business owner, there’s a high chance your accountant has asked whether you want your business to be an LLC.
What is an LLC?
LLC stands for limited liability company and is a way of classifying your business to the IRS (Internal Revenue Service).
Limited liability – If anything goes wrong and a lawsuit is brought against you, your personal assets are more protected from debt collectors.
Benefits of Forming an LLC
The main reason people register their businesses as an LLC is because of the tax benefits available, and as such LLCs are the most popular type of business entity in the U.S. They are typically more flexible, have less state law formalities and provide more liability protection than a state law corporation.
They exist independently from its members and therefore not personally accountable for business debts. LLCs are usually easier to establish than corporations with fewer reporting requirements. They offer more freedom in how the business can be run.
Think about whether your business carries any risk with people to help you make the decision to form an LLC. If you have more than one business, and if you don’t register them as separate LLCs, a lawsuit from one can reach into your other enterprises.
There are a few options when creating an LLC business structure: –
List yourself as a sole proprietor on your tax-filing.
Become an S-Corp company or C-Corp company. Few businesses do this due to the complexities of paperwork, fees, and rules.
Choices can be changed later if for example your business takes off and becomes extremely profitable, though there are some tax implications.
You’ll still pay taxes as a business owner, however, if your business loses money the tax burden will be considerably less than as a sole proprietor.
An LLC is considered a ‘pass-through’ entity in the tax industry, so any profits or losses are inherently passed to the owner, partners, or shareholders.
How to Start an LLC
Step 1 – Decide on a Name
Most states don’t allow more than one business with the same name even if they register different entities. For example, you can’t have Eddies Plants, LLC, and Eddies Plants, Inc. Additionally, there are some restrictions, such as using the word bank in the name.
TIP – Do your research and make your decision before filing the paperwork. To help you decide, check availability online in your state using any entity name check service for free. Think of something unique, particularly if there is something with a similar name in the area, to avoid confusion. If you want to set up your business online, then look at available domain names at the same time.
Step 2 – Reserve Your Name
Reserve your LLC name if you don’t intend on registering the company for a while. This can be done by completing a form and paying a fee, which could be well worth it if it’s the right one for you. You may also need to publish a notice of intent to form the LLC.
Step 3 – Choose an Agent
A registered agent (also known as a statutory agent) acts as the LLCs appropriate person, to whom official documents can be passed to in times of legal detriments, such as subpoenas and lawsuits. Agents must be over the age of 18 and a state resident to serve. Nearly all states require this.
TIP – There are companies that provide registered agent services.
Step 4 – Create an Operating Agreement
The LLC operating agreement is a process map that denotes how your LLC will be run. Although it isn’t a state requirement, it’s a valuable structure for all the business owners to help define rights and responsibilities, particularly if disputes arise.
It should describe how you intend to govern the business and what rights members have in case of death, dissolution, or exit from the business.
Step 5 – File Paperwork with the State
Formally known as the articles of organization, the act of creating an LLC is the filing of the paperwork and paying the associated fees, which vary from state to state.
Each state has different requirements for what’s needed, but the most common information is:
- The name and address of the company you are launching
- Description of the company’s business and why it was formed
- Length of its intended existence, if not perpetual
- The name and address of the registered agent
- Information about company personnel
TIP – Go online and check out your state’s requirements and processes. Ensure all the paperwork is signed by the person(s) forming the LLC.
Step 6 – Get Your Certificate
Once your paperwork is approved, you’ll receive your certificate that confirms your LLC officially exists.
Step 7 – Take Care of Business Matters
Once you have your certificate from the state, begin applying for your tax ID, business licenses, permits, and open bank accounts, etc.
TIP – if you plan to do business in more than one state, start registering your business in other states. This might be pertinent if your business is close to a state border or borders.
Setting up an LLC can cost a few hundred dollars, though it’s best to budget for a few thousand. State application fees cost from $50 in Kentucky to $500 in Massachusetts. Other expenses could include hiring a tax attorney, building a website, marketing, paying for a registered agent.
Setting up an LLC can easily be done on your own as there are plenty of available online resources available that help owners file the required paperwork. The freedom that comes with owning a small business can easily set you up for early retirement.
Have you set up an LLC? How easy was it for you? Let us know in the comments section below.