Foundations of Establishing an LLC

If you're thinking of forming a limited liability company (LLC), there are quite a few things to make sure you understand beforehand. First, let's talk about what an LLC is.

A limited liability company is a type of business entity that protects its managing members from company liabilities. Different from a general partnership, S corporation, or other business entity, any LLC provides flexibility that other business structures don't often offer, as the business owners are granted protection from any business debt or liability. What does this mean, exactly?

For example, let's say there's a bakery that has fallen behind on rent and bills for a few cake order shipments and now owes $45,000 to its creditors. If the company is an LLC, the owner or owners of the bakery will not have to pay this claim with their personal assets. In this situation, only the company's assets are able to be accessed in order to repay the debt. This way, unlike that of a sole proprietorship or limited partnership, the owners are given reprieve from having to associate their liability with that of their company's.

Now, if you want to form an LLC, it's important that you know what's required of you. Here are a few things that are required of every LLC:

1) First thing's first: You must choose a name for your limited liability company. Each state will have different regulations that you must comply with when it comes to naming your LLC, including its originality and its name determination with an LLC designator. Check with your state to see what naming requirements are in place for choosing your business name.

2) Next, choose the tax classification that's appropriate for your LLC. There are three types of taxation classifications that you can choose from for your business: Corporation, Partnership, and Sole Proprietorship. There are certain internal revenue service (IRS) forms that must be filled out for each tax classification, so make sure that you fill out the right one.

3) Make sure you file Articles of Organization. This is also known as either a Certificate of Formation or Certificate of Organization. You can do this at your state's corporate filing office, most commonly your Secretary of State. Here, you'll have to pay a filing fee when you submit the articles and other basic information such as your LLC name, and the name of its registered agents.

4) Appoint your registered agent. All LLCs must have a registered agent who accepts legal documents on behalf of the LLC if it's sued. This person must be appointed in order for you to submit your articles of organization, so it's important to choose someone you trust.

5) Decide on your management structure. Your LLC can either be managed directly by its members or by appointed external members who oversee your corporation. Whoever you decide these people to be, your management will oversee functions such as financial decisions, asset management, and strategic planning. As part of this process, you can set up an LLC operating agreement, which establishes the management and structure of how your LLC will be run.

For LLCs, members have flexibility with their management style — They can have either direct or indirect management responsibilities affiliated to the business.

6) File an annual report with a filing fee if your state requires it. Depending on the state, the filing fee will vary, but they typically range between $100-$800.

7) Apply for a federal tax number or employer identification number (EIN) if your LLC has more than one member. Even if you form an LLC on your own, you'll need an LLC if your business will have employees or you choose a corporate tax classification.

Now that you know what you need, you're well on your way to forming an LLC! Our professionals at Sorge CPA can help you determine what next steps you need to take in your LLC formation process.

Contact us today to get started on your journey!