Starting a business is no easy feat, but it’s even harder when you don’t know what steps to take. The first thing you should do if you’re looking into starting your own business is to determine the legal structure for your new company. This will be the foundation of the company.
And since you will be investing your time, energy, and money into this business, you’ll want to consider the benefits of each structure before deciding which one is right for you.
Types of companies
There are five different legal structures you can choose from when you start a limited liability company, so it’s important to understand how each one works before choosing one over another. Here is a brief description of each type of company, how it is created, and the benefits and drawbacks of forming your business entity under that structure.
1. Limited Liability Company (LLC)
An LLC is a hybrid between a partnership and a corporation. It provides all the tax advantages of a corporation while allowing for pass-through taxation like a sole proprietorship or partnership. It also provides the owners limited liability protection, which means that they are not personally liable for debts and liabilities.
Limited Liability Partnership (LLP) works almost the same as an LLC, with one important difference: All partners have unlimited liability and can be held personally responsible for debts and liabilities.
An S Corporation has some of the features of a corporation and some of a partnership or sole proprietorship. Like a corporation, it is taxed separately from its owners, and therefore offers some taxes advantage. Like sole proprietorships or partnerships, profits and losses pass through directly to the shareholder’s personal tax returns. An S Corporation has two classes of stock: voting and nonvoting. The main disadvantage of an S Corporation is that it does not offer investors limited liability protection.
3. C Corporation
A corporation is a separate legal entity that offers tax advantages and provides limited liability protection to business owners. C Corp shareholders are taxed on corporate profits, whether they are distributed or not. If you own more than 2 percent of the company’s stock, your dividends may also be subject to “two-tier” dividend taxes.
4. Professional Corporation (PC)
A Professional Corporation, or PC, is similar to an S corporation in terms of taxation and benefits. The major difference between them is who can become a shareholder; anyone 18 years old or older who meets specific state requirements can hold shares in an S Corp but only licensed professionals like physicians, lawyers, and other licensed professionals can hold shares in a PC. This protects consumers because their money will not be put at risk in the case of a lawsuit.
5. For-Profit Corporation (FP)
A For-Profit Corporation, also known as a General Corporation, is similar to a C Corp in that it offers separate legal status for the business and protection from individual liability. It can be taxed either as a corporation or under its owners’ personal income taxes.
You can create any of these structures yourself by filing articles of organization with your state’s Secretary of State’s office. How you file will depend on the structure you are creating. You should make sure that you do some research ahead of time to understand what type of company would work best for your unique situation.
How Do You Start an LLC Company in 7 Steps
Step 1: Choose a Name for Your LLC
To set up an LLC, you will need to choose a name. An available name can be determined by searching your state’s corporation database using the Secretary of State’s office in your state.
- Names can be made up of letters A-Z, except for Q and Z
- Names must not be the same as another LLC on file
- Names cannot end with ” Ltd.,” ” Corp.,” or any similar designation
- In addition to searching for available names, you should also make sure that the name is distinguishable from existing names. This can include checking trademarks, fictitious business name registrations, and corporate names already registered in your state.
Once you have determined a name is available and distinguishable, you may use it.
Step 2: Reserve a Name (optional)
Normally, you will not need to reserve a name because once your articles of organization are accepted by the state and processed (typically within three weeks), you may use any available name.
However, if you need to reserve a name before filing your LLC papers, you can do so with the Secretary of State’s office. For most states, this requires filling out an application and paying a fee. There is typically no limit on how long the reservation lasts, but it will usually expire after 90 days unless you file for renewal.
Step 3: Choose a Registered Agent
LLC owners are not required to live in the state where their LLC files its articles of organization, however, if they do not, they must designate a registered agent. This is an individual or business entity that agrees to receive legal documents on behalf of your LLC.
Registered Agent List:
- Company Secretary
- Partnership Manager
- Owner or Officer of the LLC
- Professional Corporation
Step 4: Prepare an LLC Operating Agreement
LLC members can create an LLC Operating Agreement which specifies the rights and responsibilities of the LLC members and board of directors. While this is not required by law, it can be helpful to avoid disputes or misunderstandings about how an LLC should be run.
Step 5: File Organizational Paperwork With the State
An LLC company is created by filing organizational documents with the state. In most states, you can file online or by mail. To check your state’s requirements, visit the Secretary of State’s website.
List of LLC Filing Fees:
- Most states require a filing fee as well as additional fees for tax purposes and bookkeeping. For example, Texas charges $300 to file articles of organization and $0.08 per page after 20 pages.
- Michigan charges $70, and Massachusetts charges up to $500 depending on gross income for tax purposes (minimum annual fee: $500).
For more information about what is required in your specific state, please contact your individual Secretary of State office.
Step 6: Obtain a Certificate from the State
Once your LLC is created, you will need to obtain a Certificate of Organization from the state. This certificate makes it legal for the LLC to do business in that specific state and is often required by lenders or other businesses doing business with your LLC.
Most states require payment of an additional filing fee and also include an expedite fee which allows for faster processing time. Some states allow certificates to be filed online while others require paper copies
Step 7: Register to Do Business in the Other States (optional)
In order to conduct business outside of your state, you must register as a Foreign LLC in each state where you wish to operate. The process for registering varies by state, but generally requires a fee and filing articles with the Secretary of State or Department of Commerce.
Pros and cons of an LLC company
- LLC allows for unlimited growth potential
- Easier to raise funds with an LLC than a corporation
- No limit on the number of members
- Pass through taxation (all income or losses are filed on the personal tax return)
- If the company is not managed properly, it can lose its limited liability status and become personally liable for business debts.
- This requires the filing of formal documents at the state level.
How much does it cost?
It typically costs less to establish an LLC company. The amount you pay will depend on what state your LLC is established in.
In places like New York, the fee for filing an LLC ranges from $70 -$300 depending on the gross income of your LLC. In Texas, it costs $100 plus minimum annual taxes of $800 for organizations with annual profits up to $250,000.
What to do after starting an LLC company?
As a new LLC company, you must register with the Secretary of State in your state as well as file certain documents with the IRS.
The most important step is choosing a good registered agent who knows how to handle all aspects of business registration and keeping up with state requirements.
Determine who (or what) will do your accounting.
If you are a sole-proprietor and accounting is simply an extension of your personal record-keeping, it may make little difference who does your books. Keeping accurate and thorough records will reduce the amount of money owed by you in taxes.
There are many accountants who specialize in small business, and they can give valuable advice on minimizing tax liability. If you hire such a person to do most or all of your bookkeeping, he/she can also be available for general consultation about running a business.
Acquire the necessary permits.
Attorneys in every state advise that you determine what licenses and permits are required to conduct business in your state, county, or city.
You will also need to find out about zoning regulations if your office or store is located in an area zoned for commercial purposes, because you may be able to do business there only after complying with certain requirements.
Settle on business insurance policies.
If you are operating a business, though not in competition with anyone else, or if you have employees, it is advisable to consider liability insurance. You should also ensure your business equipment so that it will be replaced if lost or damaged by fire or accident.
All states require workers’ compensation insurance for any employees. The cost of this insurance depends on the number of employees and varies widely from state to state. Other types of coverage include health and disability insurance, life insurance for key officers, property/casualty insurance, unemployment tax protection.
Double-check the hiring laws.
Employers are required to withhold federal income taxes, social security taxes, and state income taxes from their employees’ wages.
The employer must also match the amount withheld for social security and pay this over to the federal government. You may need to get information about withholding requirements from your local Internal Revenue Service office.
There is no need for an employer to provide unemployment insurance protection if his/her business has no more than four employees. If you have five or more workers, then your company must be insured against unemployment claims. Some small business owners who do not want to establish a benefit plan can elect coverage through private insurance companies.
Does an LLC make sense for me?
This is a very important question that you must answer before you get started LLC formation.
There are many factors to consider, such as whether you want to be personally liable for business debts and obligations, and how much time and money you wish to invest in the ongoing operation of your new company. If you are unsure, consider consulting with an attorney who specializes in small business law.
- An LLC is a business structure that gives you the benefits of limited personal liability for debts and obligations of your company, but less formal legal requirements compared to corporations.
- There is no limit on the number of members in an LLC Company unless it has been designated as a corporation. Ownership can be held by individuals or partners.
- LLC’s are not required to hold annual meetings or record minutes, nor do they have special taxes treatment like S-corporations and C-Corporations.
- It offers flexibility to choose which income/expense items will be allocated as flow-through deductions (passed through), therefore avoiding double taxation which is often the case with S-Corporations.
- There may also be some income tax benefits of LLC’s considering that business losses can offset other types of taxable income.
To form an LLC Company is not difficult, but there are some important things to do along the way. Make sure you get all of your policies in writing and keep up with state requirements for when taxes need to be filed.
All of the information on forming an LLC presented above is merely a step-by-step guide for your business. Please make sure to research your specific state requirements and follow them accordingly. A good registered agent will be able to help you with this process.