USA: Establishing a Limited Liability Company (LLC)
If you’re starting up in the United States, you might be thinking of starting a limited liability company. There are several particulars you’ll need to take into account, which we’ve round up here for your convenience.
If you’re thinking of starting a business in the United States, you’re probably wondering which structure is right for you, your venture, and your potential colleagues. If you’re interested in starting a partnership or a sole proprietorship, be sure to check out our articles on getting started. Here, we’re going to run down the basics of starting a LLC, or a Limited Liability Company, in the United States. As with any business, the most essential aspect of your nascent enterprise will be your business plan — thankfully, we offer free business plan templates in order to help you launch your business. And if you’re on the fence about which business structure is right for your company, don’t hesitate to check out our other articles on starting up in the US and our rundown of common business structures to consider for your new venture.
Starting a Limited Liability Company: From the Ground Up
Starting a limited liability company is a popular decision for many start-ups of various natures. A LLC is a business structure that can be understood as something of a hybrid between a partnership and a corporation. As you might have guessed from the name, LLCs shield their partners from liability for company debts and lawsuits — in this sense, it works similarly to a corporation. However, the structure of LLCs is much closer to that of a partnership, and like partnerships, they have different levels of liability between members and therefore different levels of authority within the company. In an LLC, owners are not called partners but “members,” and there must always be at least one at all times. Unlike in a partnership or sole proprietorship, a member of an LLC can be a natural person or, otherwise, a corporation, trust, or partnership.
Choosing Your Name
Before starting a limited liability company, you’ll need to decide what to call your business. As with a sole proprietorship or a partnership, you’ll need to choose a name for your LLC and it will need to include “LLC” or “Limited Liability Co.” at the end. You’ll also need to be careful that your name hasn’t already been trademarked, which you can check here.
Before you even thinking of starting a limited liability company, you’ll need to think long and hard about your operating agreement. An operating agreement, much like the operating agreement involved in a partnership (which you can find here), will include the company and its members:
- basic information (SSN, addresses, etc.)
- material and fiscal contributions
- roles and responsibilities
- profit and loss repartition
- decision-making protocols
- and operating procedures in the event of dissolution.
The operating agreement can be as long or as short as members wish it to be, although this is usually the step at which it becomes helpful to consider hiring an attorney.
Otherwise, one of the reasons that starting a limited liability company is a popular business decision is because it’s a structure that carries relatively few actual obligations upon the company. Annual meetings, for example, are not obligatory, as they are for corporations, although you will need to file an annual report and pay a fee in certain states. Do keep in mind that, in certain states, this step must be followed by taking out an ad in the local paper to announce your business venture, which must be presented to your Secretary of State when registering your business.
Articles of Organization
Before starting a limited liability company, you’ll need to file your articles of organization. Each state has a Secretary of State office where you will file your articles of organization and pay a fee that varies from state to state. Usually these fees are around a couple hundred dollars, but states like California pack a bigger punch. A helpful directory of links and phone numbers for each Secretary of State office in the US is available here. Get in touch with them as soon as possible to figure out the particulars of starting a LLC in your particular area.
Next you’ll obtain your EIN number, or Employer Identification Number, which will allow your company to legally hire employees, as well as to file for federal taxes and register a bank account specifically for your limited liability company. Open a bank account for your LLC as soon as possible and never (ever!) mix your personal finances with business finances; as an LLC, this is a potential lawsuit waiting to happen. You can get your EIN immediately and for free on the IRS website, but keep in mind that membership changes in your LLC may require that you register for a new one if a member leaves or arrives. Keep in mind that you’ll need to report any new employee hires within 20 days of their hiring to the Department of Labor in your state. Check the directory here.
You’ll also need to register with your state tax office. Keep in mind that federally-speaking, tax registration when starting a limited liability company differs from any other business structure in that while LLCs are not inherently pass-through business entities, they can be taxed either as partnerships or sole proprietorships (that is to say, on members’ individual taxes), or, if the LLC elects, as a corporation by filing IRS Form 8832. LLCs must also often pay sales tax, use tax, unemployment tax, and sometimes more, which is why you must also register at a state level. It’s very important that you get in touch with your state tax office in order to be sure of what your tax obligations will be, as this differs considerably from state to state. A directory of all state’s tax agencies is available here.
Before starting a limited liability company and undertaking business activities, you’ll need to think about insurance. Insurance changes considerably between LLCs versus sole proprietorships and partnerships. Because members are not personally liable for any lawsuits or bankruptcy, it’s essential to take out business liability insurance for your LLC. This means that if someone sues your company, you’re covered for a certain amount of damages, according to the policy you choose to take out. You’ll also need to assign a person or a company to be your company’s “registered agent,” which means the person who must be served with papers should anyone wish to sue and/or subpoena your company.
Finally, the requirements for licenses and permits varies state to state but is more in-depth for LLCs than for structures like sole proprietorships or partnerships. Check with your local Small Business Association office and keep in close contact with them throughout the process of starting a limited liability company in order to be clear on what licenses and permits your new business might require, and file for them as soon as possible so you can get rolling with your business venture!
Depending on your business, you may or may not decide to open offices or a storefront. Regardless, once you have the aforementioned steps out of the way, you should be good-to-go for starting a limited liability company. However, this article should have demonstrated that, while it’s a business structure with plenty of advantages, it does come with certain complexities that aren’t encountered in partnerships or sole proprietorships. Be sure to keep in close contact with your state’s Small Business Administration Office, your state’s Department of Labor and Tax Agencies in order to avoid seemingly small slip-ups that could end up being majorly damaging to your company and result in lawsuits or heavy fines.
Check back soon for our article on getting started as a C or S corporation. We hope these articles have been helpful to you, and don’t hesitate to leave suggestions and questions in the comments section!