Many businesses decide to file paperwork and become LLCs. But although becoming an LLC carries excellent advantages for many growing businesses, it's important to understand the requirements necessary to transition to this business structure.
What is an LLC?
In the United States, a limited liability company or LLC is a type of hybrid entity that combines some of the benefits and characteristics of corporations with some of the characteristics of other business entities like partnerships and sole proprietorships.
People form LLCs because they offer liability protection for owners and executives. If a company goes into significant debt or acquires other heavy liabilities, owners are only liable to a limited extent: hence the name.
How an LLC is More Flexible Than a Corporation
Compared to the larger (and more legally separate) organization that is a corporation, a limited liability company offers a few flexible benefits:
- For instance, LLCs can be single-owner businesses, partnerships, or even larger and multi-member structures. This allows more types of businesses across a greater variety of industries to become LLCs compared to corporations
- Furthermore, LLCs don't limit how many members may be involved. This allows LLCs to scale significantly and flexibly as they grow
What is Required of an LLC?
Despite the above benefits, it's important to understand what's required to form an LLC before you decide to start the process. This will allow you to make sure that you have all your proverbial ducks in a row before paying the myriad fees associated with LLC formation.
For starters, you'll need a business name for your LLC, and most states will also require you to add either "LLC" or "limited liability company" to the end of the moniker. The name must be unique compared to other business entities in the same state, and many business owners give this consideration great thought since it's how most of your customers or consumers will recognize your brand.
Be aware that you can keep a name on hold for your LLC for a certain period of time if you pay a fee and file the appropriate paperwork with your state's business department.
The operating agreement is the official document that describes most of the major aspects of your LLC, including:
- The management structure for your LLC
- How your capital will be invested
- How profits will be divided
- The process of onboarding or removing a member of your LLC
- And more
All of this isn't filed with your state but is instead kept with the rest of your business's official and important paperwork. You'll need to draw this up with careful consideration from any partners in your LLC, as well.
Business Licenses and Permits
Each state has at least one set of licenses and permits you'll need to acquire to legally operate within its borders. Depending on your location and industry/niche, you may also need to acquire local business permits or licenses.
Both types of documents usually come with annual fees. These are often not exorbitant but are additional costs to factor in to your business's total expenditures.
States like New York also require you to publish a public notice of the existence of your LLC in official publications like newspapers. Depending on the requirements, this can cost you up to several hundred or even thousands of dollars.
Most states also require you to have a registered agent to serve as an official point of contact for any paperwork, such as legal documents. The registered agent can be a member of your organization or you can hire a registered agent service to provide you with such a professional for an annual fee.
The biggest requirement for a registered agent is that they have to be a physical resident of the state in which your LLC operates.
Articles of Organization
The Articles of Organization is a legal document that you must file with your LLC application. This legal document must be filed with the primary state of your business's operation, and each state has slightly different Articles of Organization requirements.
The Articles of Organization must have key information like the address and name of your LLC and registered agent, the names and signatures of any LLC owners, and more. You'll further need to pay a filing fee that can range from as low as $40 up to several hundred dollars depending on your state of operation.
If the Articles of Organization are approved, you'll get notified by your state's business department, which will confirm that your LLC officially exists.
Annual Reports and Fees
Most states also require that you file annual paperwork for your LLC, which includes both fees and descriptions of the state of your business. For example, California requires both an annual $800 LLC tax and an additional $20 tax every two years. Some states have much lower annual fees, however, and different annual reporting requirements.
Don't forget to consider tax forms – specifically, you’ll need the LLC tax Form 1065 if you want to file your tax returns based on partnership or multi-member income. You'll need to file this form alongside other income tax forms.
Additional forms you may need to consider include:
- Tax Form 1099, which is required is you do business with other companies and they pay you over $600
- LLC tax extension forms like Form 7004. These forms are used if you need additional time to file your LLC taxes
- Tax Form 8832, which is a form used by LLCs if their partnerships use alternative tax standards
Who is an LLC Best For?
LLCs are most often best for companies looking to grow significantly, particularly if you have multiple members looking to partner up for business over the long-term. Limited liability companies are safe business structures that insulate multiple members from bearing too much liability in the event that the business goes under or too much debt is taken on.
LLCs don't need multiple members, per se, but they're most useful for partnerships or multi-member organizations as opposed to sole proprietorships. LLCs are also not strictly necessary for all businesses, especially for very small businesses with a low number of employees and one major executive.
Work with a Lawyer to Create Your LLC
It's always a great idea to work with a lawyer when forming an LLC. Lawyers can look over all the official paperwork and documentation required to start your LLC (and there's a lot of it), as well as advise you about names, filing schedules, and more. Don't hesitate to hire a lawyer when forming LLC: the cost is well worth the benefits and the peace of mind knowing that you filed everything properly.