What is an LLC? How to start an LLC?

An LLC, or limited liability company, is a popular choice for small business owners due to its protection against personal liability, flexibility in management, and tax advantages. Knowing the disadvantages and advantages of LLC formation and the steps to start one is crucial for business success. 

Limited liability companies are required to submit annual beneficial ownership reports starting January 1, 2024. However, this does not affect the liability protections for  owners. Limited liability companies formed or registered after January 1, 2024, must file within 90 days and those formed or registered before 2024 must file by January 1, 2025.

Setting up your business as a limited liability company is crucial. LLC formation involves filing paperwork with the state. Still, to ensure success, you must also consider your business name and finances, create an operating agreement, and obtain the necessary licenses and permits. This article will guide you through understanding how LLCs work.

What is an LLC?

Limited liability companies, commonly known as limited liability companies, offer business owners protection from liabilities, cost savings, and simplicity compared to corporations. When you carry out an LLC formation, it safeguards personal assets in case of legal issues or financial difficulties. 

The appealing part is that it allows flexible taxation options, recognizing that not all businesses operate similarly. These are like a mix of corporations, partnerships, and sole proprietorships, making them a great choice for small business owners. The protection against liabilities is similar to what corporations provide, but the tax flexibility for members resembles that of partnerships rather than limited liability companies.

How To Start an LLC?

Starting a limited liability company isn’t hard but involves following steps and considering some important things. Here’s a simple six-step guide to help formation on the right track.It is important to follow your state’s guidelines when filing your application, although the steps are generally the same across all states.

• Name Selection and Reservation :When considering a name for your business, it’s crucial to consider a unique name that includes “LLC”,”Limited Liability Company” or “Ltd”.Your business name impacts your brand and needs to meet state law requirements.
• Select Agent: Make sure Your business name must comply with state laws, Designating a registered agent who will be responsible for receiving legal documents on behalf of the  limited liability company will make this easier.
• Make agreement: Check your state’s naming requirements by visiting the Secretary of State’s website. Prepare an operating agreement that clearly outlines the ownership and operating procedures of the Limited Liability Company.
• EIN(Employer Identification Number): Obtain an Employer Identification Number (EIN) from the IRS to identify your business for tax purposes and open a business bank account.
• License and Permits:  Depending on your industry and state, you may need to complete forms and pay fees for business licenses and permits.
• Business Account: Keeping your business finances separate from your personal finances is important. To achieve this, it is recommended to open a separate bank account for your business.

How does LLC work? 

A Limited Liability Company is a business structure that combines the limited liability protection of a corporation with the flexibility and tax benefits of a partnership or sole proprietorship.

Here’s how it typically works:

• Limited liability companies are allowed by state laws, and the rules that govern them can differ from one state to another. People who own LLCs are usually the members.
• In many states, ownership restrictions exist, meaning anyone—individuals, corporations, foreigners, foreign entities, or even others —can be a member. However, some entities, like banks and insurance companies, cannot carry out LLC formation.
• To formally establish you must submit articles of organization to the state. Compared to a corporation,  limited liability company formation is easier and offers more flexibility and protection for its investors.
•  Limited liability companies have the option not to pay federal taxes directly; instead, the profits and losses are on the personal tax returns of the owners. The  limited liability company can also choose a different classification, such as a corporation.
• If there is fraud or a company fails to meet its legal and reporting obligations, creditors may be able to pursue the members personally.
• It’s important to distinguish LLCs from Unlimited Liability Corporations (ULC), a corporate structure allowed in certain countries and some Canadian provinces.

Advantages of LLCs

Instead of running a sole proprietorship, partnership, or corporation, LLC formation usually offers more advantages than drawbacks.

• Limited Liability: In a limited liability company, the owners are free from personal responsibility for their actions. It means creditors can’t go after the owners’ assets like homes or savings to pay business debts. 
• Flexible Membership: Members in an LLC can be individuals, partnerships, trusts, or corporations, with no limit on the number of members. In contrast, S corporations have more restrictions on shareholders, and there’s a maximum limit.
• Management Structure: In an LLC, members can manage the business or choose a management group. On the other hand, a board of directors, not the shareholders, controls the corporations. In a member-managed structure, owners oversee daily operations, while in a manager-managed structure, appointed managers handle business management, similar to a corporation.
• Pass-through Taxation:  Limited liability companies usually don’t pay taxes at the business level. Instead, any business income or loss is passed through to owners, reported on their personal tax returns, and taxed at the individual level. In contrast, corporations (C corporations) get taxed at the business level, and shareholders on their distributed income.
• Credibility: Starting as an LLC can enhance a new business’s credibility more than operating as a sole proprietorship or partnership.
• Limited Compliance Requirements: Limited liability companies face fewer state-imposed compliance requirements and ongoing formalities than sole proprietorships, general partnerships, or corporations, whether taxed as S corporations or C corporations.

Articles of Organization for creating LLC

Creating a limited liability company involves officially submitting “articles of organization” documents to your state. These articles typically include:

• Name
• Main Business Address
• Purpose and Duration
• Management Details (whether members or a manager handle operations)
• Registered Agent’s Name and Address
• Signature of one or more  organizers

The processing time varies; some states are quick, while others take a few days to weeks. If you’re in a hurry, some states offer expedited processing for an extra fee.

Once your paperwork is approved, the state issues a “certificate of formation” confirming your existence.

What is Operating Agreement Creation for LLC?

An operating agreement is an important document for your limited liability company. It spells out how your business operates, deals with finances, and divides profits. Creating an operating agreement on your own can work for single-member formation. But if you have multiple owners, getting a qualified attorney is wise. This agreement should cover member and manager powers, profit and loss distribution, and procedures for buyouts or dissolutions.

A well-drafted operating agreement offers several advantages:

• It helps prevent conflicts among members.
• It adds an extra layer of protection for personal liability.
• It ensures smoother operations.
• It protects your assets.

To bring your new limited liability company into official existence, you must submit LLC formation documents (also called Certificate of Organization, Formation certificate, or Articles of Organization) to the Secretary of State’s office or the relevant department in your state that manages business filings. 

The filing fees vary across the U.S. Most states allow online submission, with filing fees ranging from $50 to $150 (some states may charge over $200).

Compliance Requirements Of LLC

In the US LLCs are subject to both internal and external compliance requirements. The internal compliance requirements include keeping an up-to-date operating agreement, maintaining proper record-keeping, and holding annual meetings. On the other hand, external compliance requirements include filing annual reports, obtaining business licenses and permits, and submitting beneficial ownership reports under the Corporate Transparency Act (CTA) starting from January 1st, 2024.

 Limited liability companies must have a registered agent and office, issue membership shares, record all membership interest transfers, and maintain financial statements, tax returns, and reports for six years. State compliance requirements vary, so it’s important to follow the regulations in the state where it is formed.

The consequences of non-compliance with LLC regulations in the US can be significant. They may include termination of business, imprisonment, loss of good standing, fines, penalties, and personal liability.

Get help with your business needs from Eqvista!

LLC formation is an exciting journey with many benefits, like protecting yourself from liabilities, tax flexibility, and an easy limited liability company formation process. 

Our step-by-step guide helps you understand different structures, drawbacks, and tax implications to determine if it’s the right choice for your business—whether a small startup or a big company.

At Eqvista, we offer personalized services and packages, including cap table management and unlimited 409A valuations. With our Freemium plan, you can begin for free and upgrade as your company grows. Ready to start? Sign up now!