Today’s aggressive digital landscape has provided various opportunities for aspiring entrepreneurs to launch their ideal ventures. Thanks to business structures like limited liability companies (LLC), startups have found safer and more flexible ways to establish their enterprises online and otherwise.
In this guide, we’ll take a closer look LLCs in general and how to form an LLC to launch your online business.
Understanding the LLC Structure
An LLC is a business structure recognized across all US states, designed to protect owners from a company’s debts or liabilities. These hybrid entities combine the elements of a corporation and sole proprietorship and are owned by multiple shareholders, generally called “members.”
Most states don’t restrict individuals from becoming a member. That means anyone can be an owner, including individuals, corporations, foreigners, and foreign entities. Even other LLCs can become members of other LLCs. Aside from that, they can also establish different types of businesses, including online companies.
Meanwhile, certain entities can’t form an LLC in all states. These include banks, insurance companies, and financial trusts.
Benefits of Building an LLC
LLCs have become popular for entrepreneurs and organizations who want to launch a new business venture. Here are some of the reasons why.
One of the most common reasons organizations establish an LLC is to provide owners and members with liability protection. Certain LLCs separate an individual’s asset from the company’s. If the entity fails due to a lawsuit or bankruptcy, those involved will not be liable for any debts or legal obligations, protecting themselves and their properties.
Establishing an LLC offers a more accessible and inexpensive process than other business structures. Owners can complete all the required paperwork online or at a local office in their chosen state. Some states even offer professional assistance when forming LLCs.
Once you’ve completed the paperwork, all you need to do is file a particular document and pay the filing fees required by your state. These fees are usually less than a hundred dollars, making this structure the perfect option for those wanting to start a company without spending too much money.
An LLC can be treated as a pass-through entity or a business that doesn’t pay its own income tax. Thanks to LLCs, income, losses, credits, and deductions can pass through to an owner’s tax return. Its profits are taxed according to a person’s individual income tax rate. Because of that, owners can avoid the possibility of double taxation.
Types of LLCs
When establishing your LLC, there are various options to choose from that will fit your enterprise.
Single-member LLC or sole proprietorship
As the name implies, this LLC only has one owner. They can hire more employees but not additional owners or members. With this LLC, the sole proprietor can avoid double taxation by passing the business as part of their personal tax return. However, this LLC doesn’t offer protection from personal liability.
This LLC is an informal business arrangement involving two or more people that agree to own and operate an LLC equally. Each owner is considered a legal member of the LLC. They can divide their profits and losses evenly. Plus, they can pass their business through their personal tax return, but they don’t have any personal liability protection.
Family limited partnership
Family limited partnerships (FLPs) are entities formed by family members who combine their resources to launch and operate a company. They’re an excellent choice for families who want to pass down their wealth from one generation to another.
FLPs typically consist of two types of owners: general partners and limited partners. General partners handle the operation, while limited partners don’t have any management responsibilities. However, they can still buy into the business to generate income.
This type of LLC allows owners to separate their business operations and assets into different subsets or series. These subsets can function as a regular LLC, allowing owners to protect a series from liabilities with another one. However, not all states allow series LLCs.
More commonly known as a low-profit limited liability company, the L3C is a hybrid structure that combines the elements of a standard LLC and a non-profit organization. They can profit from the LLC, but owners must use it for a charitable cause. Unfortunately, like the series LOLC, not all states recognize this business structure.
Member-managed LLC or manager-managed LLC
This structure refers to how a standard LLC is managed. It’s when all owners or members share responsibility for operations. A member-managed LLC is a popular option for small enterprises, while a manager-managed LLC is best for bigger companies. The latter provides more flexibility to owners looking for a less active management role. They can designate members to handle everyday operations or hire employees to do it for them.
Tips When Starting Your LLC
Business owners must take certain procedures when establishing an LLC. Whether a business is online or not, these are the crucial steps needed.
Select your current state
The first step of setting up an LLC is to determine the state where you want to launch your business. This is a crucial process because the rules vary from state to state. The laws, requirements, and fees will depend on your chosen area.
Ideally, you want your LLC to be in the state where you live. However, there’s no strict policy against choosing other states. It will only make your business a foreign LLC. A foreign LLC is a company created in one state and registered as a foreign entity in another.
Once you’ve determined your ideal state, start gathering knowledge about the local procedure when establishing your LLC. Then you can proceed with the following steps.
Establish a business name
Choosing the right name goes beyond branding and marketing. Think of it as your company’s legal name, meaning it must abide by your state’s legal requirements.
Generally, all 50 states require businesses to avoid using names that mislead the public. For example, rearranging words in an attempt to mimic more established brands. Some states prohibit corporations from using terms that indicate their field. These include trust, bank, and insurance. Others require companies to have “LLC” or “limited liability company” in their legal business name.
Meanwhile, your legal or LLC name can be separate from the one you want to use when operating. However, you might need to file a “doing business as” or DBA document. This step is prominent for e-commerce businesses because online brands tend to use a different name than their registered one.
Choose a registered agent
All states require LLCs to have a registered agent. This individual is responsible for receiving and processing official or legal documents on the LLC’s behalf. They must be at least 18 years old and are always available at an address in the state during regular business hours.
You can name an employee as an agent or designate a third-party company that provides such services. Of course, the latter comes with a fee that could be costly. That’s why keeping this person within the state and company is better.
Regardless of the state, you can also act as your LLC’s registered agent. Many LLCs do this because it’s a cost-efficient solution. However, this option is not always best for business owners. Being an agent bears many crucial responsibilities, primarily handling legal matters. If you’re not knowledgeable about these processes, acting as your agent may only distract you from running your business. Plus, you will make your vital records public if you become the legal agent.
When designating an agent, consider your options carefully. You could consult a legal expert or a professional agency before appointing a person. Once you do, you must list the agent in your Articles of Organization document.
File the Articles of Organization
The Articles of Organization document will establish your LLC as a legal enterprise in the state. In other states, this document is called the Certificate of Organization or Certificate of Formation. Knowing what your state calls this form is crucial so you don’t get confused when filing.
Acquire the necessary form and fill it up with all the vital information. The fundamental details you must provide are the following:
* Business name
* Address of principal business location
* Purpose of business
* Contact information for the registered agent
* Duration of the LLC
You might also need to include details like how you will manage your LLC. Once you’ve completed these steps, one or more owners must sign the document. After checking all details, you must pay a fee to file the document. Approval generally takes around seven to ten business days.
Once the state approves your formation document, they will issue a certificate to indicate that your LLC is registered legally. Keep this certificate because it might be needed for other processes like setting up a business bank account and getting a tax ID number.
Set an LLC operating agreement
The LLC Operating Agreement outlines the ownership and responsibilities of all members or owners in the organization. It’s an internal document that provides all the essential details about the business, from the share of each member to their specific duties. Some even include how LLCs distribute profits and losses between members.
Most states don’t require an LLC operating agreement. However, creating one would be helpful to establish a strong business foundation and reduce all uncertainties about the partnership.
Get an employer identification number (EIN)
The EIN is a unique combination that acts as a tax ID number used by the Internal Revenue Service (IRS). This number is crucial for different processes, including opening a business bank account, processing payroll, and applying for permits.
To get your EIN, go to the IRS website and fill out an application for free. However, you will need a personal Taxpayer Identification Number to conduct this process.
Attain your licenses or permits
After forming your LLC, it’s time to acquire all the necessary licenses and permits. Look into your local state laws to determine the ones you need. The most common ones are building, health, seller or reseller, and tax permits.
The good news is that this information is generally available to the same office or website that handles your LLC filings. Always be mindful of crucial deadlines because you’ll likely have to renew your license or permit periodically. Failure to renew these requirements could cause your LLC to lose its legal status.
Open a business bank account
Opening a business bank account is crucial to pay for your operation’s expenses, like owner and employee income. You can only do this step when you acquire your EIN from the IRS.
Knowing the requirements before opening your LLC bank account would help you prepare for them before getting your EIN. Generally, most banks require a copy of your LLC paperwork, an EIN confirmation letter, and your ID, like a driver’s license or passport.
Start Your Online Ventures Today
The process of establishing an LLC may seem overwhelming. It may take time, but the steps involved are relatively simple. The key is to determine the type of LLC you prefer and your local state’s requirements. Plus, know the necessary procedures, like the ones mentioned above, to start your venture today.