Want to Form an LLC? Here are the Steps to Take
Steps in the Process of Starting an LLC
If you are interested in learning how to form an LLC, this article will provide you with details about this business form and the process of forming an LLC. The process of forming the LLC is the same for both the single-member (one person) LLC or multiple-member LLC. The difference is in how the LLC is taxed - a single-member LLC is taxed as a sole proprietor, while a multiple-member LLC is taxed as a partnership.
A limited liability company (LLC) (sometimes mistakenly called a "limited liability corporation") is an accepted business form in all U.S. states. An LLC is formed in a state and has "members" (similar to partners).
The process of forming an LLC with a state is fairly simple, depending on the state. But there are some decisions you and the other owners will need to consider before - and after - you make that application.
The owners of an LLC are called members. The owners of an LLC can be:
- Individuals. A single individual can own an LLC or a group of individuals can be owners.
- Other Businesses. A corporation or another LLC can own an LLC.
- Trusts. A trust can own an LLC.
- Foreign ownership. Foreign individuals may own an LLC, but there are tax and legal consequences to foreign ownership that should be considered with an attorney in the state where the LLC is located.
Banks and insurance companies cannot own an LLC.
LLC's taxed as S corporations must adhere to IRS requirements for ownership:
- Only individuals certain trusts, and estates can own shares in an S corporation
- Partnerships, corporations, or non-resident aliens can't own S corp shares, and
- Some types of corporations are ineligible to be an S corp.
Even if you do not plan on hiring any employees, you should still obtain an Employer ID (EIN), a Tax ID for your LLC. You will need this number for many business documents and contracts, as well as your business checking account.
The IRS deals with LLCs differently from other business types for EIN purposes. You will need to pay attention to the instructions for Form SS-4 (the application form) for question 8a.
You can complete an EIN application on Form SS-4 online, by phone, or by fax.
You'll need to designate a responsible party for the application, someone who controls, manages, or directs the operation of your business.
In most states, you will need to register your LLC with your state by filing Articles of Organization with your state's business division (usually in the office of the state Secretary of State. You will need to gather information and make some decisions for this filing
The information needed to complete this registration form varies by state. Go to your state's Secretary of State website and look for the business division to find specifics on how to register your LLC.
In some states, you must file a certificate of organization (sometimes called a certificate of formation) with your state to register a new LLC. The information needed is similar to the Articles of Incorporation and it varies by state.
An operating agreement sets out all of the decisions about the business, including member responsibilities and duties, how profits and losses are distributed to the members, and the effect on the LLC if a member dies, leaves, or is asked to leave.
Each state has default rules for operating an LLC, so you definitely need an operating agreement to override the default if there's something you specifically want or don't want in your agreement.
Every LLC, including one with only a single member, should have an operating agreement.
Registering your LLC in a specific state doesn't include registering for employment tax and sales tax purposes. Get these registrations in place before you start your business, because you'll have to start accounting for these taxes right away.
Income Tax. If your state has an income tax, you'll need to register with the state's tax department for business tax purposes.
Sales Tax. If you are selling taxable products or services (as determined by the state) you'll also need to register with the same taxing authority. States are changing their regulations for taxing internet transactions in the wake of a recent Supreme Court decision. If you are selling online, check to see if you must collect sales taxes.
Employment Tax. If you have employees, you may also have to collect state income taxes and pay them to the state taxing agency.
If you want to file LLC taxed as a corporation, you will need to complete an election form after your LLC is up and running. Having an LLC structure and corporate taxation may be an advantage to your business, depending on specific tax and legal aspects of your business. Before you consider making this election, discuss the possibility with both your tax and legal advisors.
If your LLC does business in more than one state, you will need to register as a "foreign" LLC in the other states, in addition to the original state where you registered. For example, if you initially registered as an LLC in Ohio, and you want to set up a store in Pennsylvania, you'll have to register as a foreign LLC in Pennsylvania.
Do I need an attorney to form an LLC? How much will the LLC documents cost? What are the recordkeeping requirements for an LLC? Find the answers to these and other LLC questions in this article.