Published December 18, 2015
Limited Liability Companies have become a popular choice for Entrepreneurs because they protect the owners from being exposed to personal liability for the debts and liability of the business, and because they also have much less governance requirements than corporations. The less time that the Entrepreneur has to spend on the corporate governance of the enterprise means the more time they have to spend on running the actual business and increasing revenue.
Some additional advantages and characteristics of an LLC include:
No double taxation. Allocated profits are taxed as individual income through the individual income tax return of each member and are not taxed at the corporate and shareholder levels like with a Corporation.
Power to control sharing of profits. There is no rigidity of profits being distributed according to capital contribution, and the members may elect to distribute profits according other factors.
The first step of starting an LLC is to file the Certificate of Formation with the Secretary of State. Standard forms are available on the website; however it is best to have an Attorney draft the Articles specifically tailored to the particular business so that relevant details can be adequately expressed. Important information that is included in the Articles includes:
The names and address of each Executor.
Whether the LLC is going to be managed by its members or if there will be a designated Manager. Securities Regulations may apply if an LLC is Manager-Managed, so it is important to discuss this issue with an Attorney.
The Registered Agent. This is the person that will accept service on behalf of the LLC and is also commonly the LLC’s Attorney.
The name and address of the business
The next step for forming an LLC is to draft an Operating Agreement. This is the agreement that determines how much of the LLC a particular member owns, along with the rules for running the LLC. Important issues dealt with by the Operating Agreement include voting rights, member transfer of interests (buy-sale of shares), and dissolution. The Operating Agreement is not filed with the State; it is an executed agreement between its members.
Once the LLC is created with the state it also must obtain the required state and local business licenses in order to carry out business. This is done by filing a state business license application with the Department of Revenue. A city business license is also required and an application with the city where the business is located can be filed in conjunction with the state application. The Department of Revenue will issue a Unified Business Identifier (UBI) number once the application is filed. This number can be used for later filings, including registering with the federal Internal Revenue Service and opening a bank account.
The LLC must also file with the IRS in order to obtain an Employer Identification Number (EIN). This filed online with the IRS.
Depending on the type of business, special professional or industry permits may be required as well. This is true at both the state and city level.
Once the LLC is established there are still annual reporting requirements that must be met. In addition, any changes in ownership by the members, or adding new members, require additional compliance that an Attorney can assist with. For instance, changes involving removing and adding members must be filed with the Secretary of State, whereas changes in ownership or internal governance can be done through amendments to the Operating Agreement.
There are other issues to be taken into account after the LLC is formed that can depend on the type of business, such as workers compensation insurance. It is important to discuss these issues with an Attorney while planning the business so that no legal obstacles emerge that can hinder or delay the start of business.
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