Setting up an LLC can be a great move for your business. But before you do anything, make sure you understand what an LLC is, how an LLC works, and why an LLC might be the right legal structure for your business. At Prime Corporate Services, we’re experts in helping you choose the right business structure to help you maximize profits and minimize hassle, and setting up LLCs is one of our specialties. Whether you’re setting up an online business that you run from your home, a service-based business, or a brick-and-mortar operation, a limited liability company could be the right structure for your entity. Read on for the 411 on LLCs, including all the ways an LLC can help you protect yourself and your assets as your business grows.
What is an LLC?
You see those three letters all the time, but many people don’t actually know exactly what they mean. If you’re in that boat, don’t worry—Prime Corporate Services is here to help.
LLC stands for Limited Liability Company. LLCs do exactly what the name suggests—they protect you and your assets by limiting your liability. Essentially, this structure shields your assets from any legal actions that result from your business dealings by setting your business up as a completely separate business entity. The LLC structure offers flexible yet robust liability protection, making it one of the most popular ways to set up a business.
Why set up an LLC?
There are many reasons to consider setting up an LLC. Limited liability companies can offer a powerful level of protection with the benefit of flexibility. When it comes to size, LLCs are infinitely flexible—whether you’re going it alone or you have hundreds of employees, this type of business entity works to protect you through all stages of business growth. And even though you have robust protection, you don’t have all of the rigid rules that can come with incorporation, so you can skip all the meetings, extensive corporate records, and other legalities corporations must abide by.
Benefits of an LLC: Protection and Flexibility
The most important benefit of an LLC is the protection it provides in the event your business faces any legal issues. Setting up a limited liability structure will shield your personal assets. If someone decides to sue your business, they cannot go after your personal assets with an LLC structure. You are protected from any judgments that go against your business. If your business doesn’t have enough assets or liquidity to pay the judgment, nobody can force you to dip into your personal assets to cover the shortfall.
With an LLC, you have ultimate flexibility in setting up your business’s management team structure. Many LLCs are member-managed, which means the day-to-day responsibilities are handled by the owners (“members”). Others are manager-managed, meaning an outside agent—hired by the owners—handles the daily running of the business. With an LLC you can have an unlimited amount of owners, and the structure makes it easy to divide profits among the owners based on an operating agreement. LLCs are also one of the most flexible legal structures in terms of paperwork, as they require much less documentation than a corporation or other business entity.
How are LLCs taxed?
From the federal government’s perspective, LLCs are not separate taxable entities; instead, they are “pass-through entities.” This means that all of the profits and losses of the LLC are passed through to the members. Because of this structure, LLCs do not pay federal income taxes. At the state level, they may incur an annual tax.
If your LLC has only one member, your LLC will be treated as a sole proprietorship for federal tax purposes. This means that you will report all profits and losses on schedule C and submit with your 1040 tax return each year. The profits are taxable even if you leave the money in the business.
If your LLC has more than one member, the IRS will treat your business as a partnership. Each member will pay taxes on their share of the profits (as set forth in the operating agreement) by submitting Schedule E with their personal tax return.
Other tax considerations for LLC Members
The IRS treats LLC members as self-employed business owners rather than employees of the LLC, so the members are not subject to tax withholding. Instead, each LLC member must set aside the funds to pay taxes on their share of the profits. The IRS requires each member to estimate their taxes due for the year and make quarterly payments in April, June, September, and January.
Because LLC members are not considered employees, no contributions to the Social Security and Medicare systems are withheld from their paychecks. Instead, members pay self-employment taxes (on top of their income tax) directly to the IRS each year.
The tax experts at Prime Corporate Services can help you reduce your taxable income and make the most of your LLC structure. Schedule a consultation now, or read on for more information about setting up an LLC for your business.
What is the difference between an LLC and a Corporation?
In many ways, limited liability companies and corporations are quite similar. Both structures protect owners (called “llc members” in a limited liability company) so their personal assets are not on the hook for liabilities or debts incurred by the business. The biggest differences lie in the details of how the structures are owned and maintained. On the ownership side, LLCs have one or more llc members, while corporations have shareholders. On the operations front, corporations normally require more rigorous and formal record keeping, and have stricter reporting requirements. Generally speaking, LLCs are easier to start and maintain, but if you are thinking of seeking public or private investors, incorporating may be a better move.
LLC laws and regulations vary from state to state
If you are interested in forming an LLC, Prime Corporate Services can help you navigate the specific regulatory framework in your state. Each state can have different filing requirements, restrictions, regulations, and tax ramifications that make it important to understand the state-specific details related to forming a limited liability company.
Starting an LLC
If you’re looking to set up an LLC, these steps should give you a general outline of how to get started. Remember that the regulations and requirements vary by state—if you want state specific guidance, reach out to us for a consultation.
1. Choose a business name
Choose a name that is unique—you don’t want to run into potential trademark issues or create confusion. You also need to make sure the name isn’t already taken. Most states offer an online tool to check the availability of names on the website of the state business filing agency. This is a quick and easy way to figure out if your name is available. If it’s available, but you’re not quite ready to file your LLC paperwork, you might be able to reserve the name for a period of time.
2. Designate a registered agent for your LLC
You will need to select an individual or company in the filing state that will receive your official documents on behalf of your LLC. Most states require a registered agent when you set up an LLC.
3. Prepare the operating agreement for your LLC
Not every state will require this, but it’s a good idea to draft one anyway. This will serve as a crucial blueprint for how your LLC will run.
The operating agreement typically covers:
- The structure and organization of the business – Who will run the business (managers or members)? Who will serve as your registered agent?
- Division of company profits and losses – How will the money be divided?
- Voting requirements – Who gets a say in how the business is run?
- Rules related to transferring and selling shares – How will you handle it if one member wants to leave the LLC?
- Procedures for dissolution of the company – How will assets and liabilities be handled if the company dissolves?
4. Obtain an Employee Identification Number
You can get an Employee Identification Number (EIN) by filing Form SS-4, or applying online at the Internal Revenue Service website.
5. File articles of organization with the state.
Once you file articles of organization with the secretary of state’s office, your LLC is official. The fees will vary from state to state, and some states may call the articles of organization something else, like a “certificate of formation.” Your state should have an online site with all the specifics for your location, but if you need help navigating this part or just want to save time, the experts at Prime Corporate Services are just a quick consultation away.
Starting an LLC: FAQs
If you think you’re ready for an LLC for your business, but you’re not ready to tackle the paperwork and tax planning on your own, the experts at Prime Corporate Services would love to talk with you about how we can help. Reach out today for a consultation, and check out these questions we frequently get from entrepreneurs and business owners from around the country:
Are there any disadvantages to forming an LLC?
Because LLCs are so flexible and offer appealing protection for your personal assets, it may seem like there aren’t any disadvantages to setting up an LLC. While it’s true that there are many pros to this structure, there are a few cons that may be important for you to consider. Although the filing fees for registering an LLC aren’t normally prohibitively large (they range from $40 to $500, depending on your state), you do need to factor those costs into your planning. Operating as a sole proprietorship is an alternative option that does not entail registration fees. If you’re planning on seeking investors now or in the future, an LLC may not offer the types of reporting requirements that many investors like to see, and it will not allow you to sell stock in your company. If you hope to sell equity in your company at any point, you may want to consider forming as a corporation instead of an LLC.
Does my LLC need a bank account?
If you decide to start a business that is structured as a limited liability company, you might have questions about how the money will be handled. Many people ask us whether or not they are required to have a separate bank account for their LLC. The technical answer is no—there are no state or federal regulations that require a separate bank account. But it’s important to note that most lawyers and accountants do recommend maintaining a dedicated account for your LLC. From a liability protection perspective, keeping your personal and business assets separate makes good sense, as it reinforces the idea that the business is distinct from the person. From a tax point of view, having a separate bank account for your LLC makes it easy to track income and expenses without having to sift through personal withdrawals and deposits.
How do LLC owners get paid?
If you are operating a single-owner LLC, you will not get paid a salary or wages like you would if you worked for someone else’s company. Instead, you will draw funds from the LLC’s profits as an “owner’s draw.” If your LLC has more than one member, the LLC operating agreement will define the rules for profit allocation. You can withdraw funds throughout the year by accessing your LLCs capital account, or you can withdraw them at the end of the year. Even if you choose not to withdraw your share of the profits, you will still be liable for taxes on that amount.
Can an LLC be a home based business?
Many people have online businesses that they run from their home offices or other home-based businesses. The LLC structure can be a perfect option for these type of businesses, as it protects your personal assets and creates a legal separation for you and your business, even if you are occupying the same living space.
Do I need a lawyer to form an LLC?
You do not need an attorney or any form of legal representation to form an LLC in the United States. However, engaging the services of an expert who knows the ins and outs of setting up an LLC in your state can end up saving you time and money in the long run.
How much does it cost to form an LLC?
The cost of forming an LLC varies from state to state due to the state fee. For example, the state fee in Arkansas is $45 while the state fee in Massachusetts is $520. While you will always have to pay the state fees, there are other costs associated with filing your LLC correctly. Having professional help is a must when it comes to filing your LLC. PRIME can help set up your LLC for the filing fees and hard costs.