There are certain legal terms—like LLC—that get thrown around so often that you might feel like you already know it all. Or maybe you are embarrassed to admit that you don’t know it all already. Whatever the case may be, ZipBooks has got you covered with a comprehensive review of what an LLC is and why it matters for your small business.
What does LLC stand for and what does it mean?
LLC is an acronym for “Limited Liability Corporation”. A limited liability corporation is a corporate structure designed to protect your personal assets from liability incurred while running your business. You might be able to remember is using this phrase, “The limited liability corporation limits my personal liability from business done through the corporation.”
What Types of Businesses Should Choose an LLC?
If you don’t think you really need to create a company for your business because you don’t even know if it will take off, you probably want to get an LLC. If you aren’t sure about what your business is going to do exactly, and you don’t want to spend a bunch of money on a separate tax filing LLC is a great option.
LLC is not a great fit if:
- you are planning on raising money to fund your company
- you don’t have any personal assets of substantial value (home, car, etc.)
- your company needs flexible tax and management options
Whether you are a sole proprietor, have a single partner, or a multi-member corporation, the LLC is a great choice for small business owners, because it provide many of the same liability protection that you would get with a much more complex corporate entity.
LLC is not legally allowed if:
- you are planning on starting a financial company, like a bank, financial trust company or insurance agency
- you are located in a state that prohibits your industry from forming an LLC
What are the benefits to me besides legal protection?
- Larger contribution limits than w2 employees If you have a LLC and you are making contributions to retirement, the government figures that you are self-employed. Since you are paying more in taxes than an w2 employee, it makes sense you should also be able to contribute more to your retirement in a tax-preferred account. You can learn more about solo 401(k) investing here.
- Flexible tax status By default LLCs are taxed as a sole proprietor. But they have the flexibility to elect to be taxed as an S corp. If you make more than $40k through your LLC and you are self-employed than electing to be taxed as an S corp is a no-brainer.
- Leasing We all know that you can write off a portion of your home from your taxes for business usage, but did you know that you can lease your personal assets to your LLC? That’s because your LLC is a separate entity from you personally. You’re still creating a tax deductible expense for your LLC but with the added benefit of increasing your personal assets.
- Heightened credibility If you have a corporation, you have a business name which is more likely to establish credibility with your potential customers. You also need a corporation in order to build up a business credit history.
- Straightforward If you want to get all of the benefits above with the least work possible, LLC is definitely the way to go. There are less filing requirements and tax preparation needed for an LLC than you other corporate organization options.
What things should I be aware of before I setup an LLC?
- Creation and ongoing expenses Creating an LLC is not an zero-cost proposition. You have to file Articles of Organization with your state in order to form an LLC. You have to also pay a filing fee with the application submission. Every state has an annual fee to renew your LLC. The cost of creating an LLC depends on the state.
- Public notice In some states, you’ll be required to publish notice of the LLC formation in local newspapers for several weeks. Given the trend toward digital advertising, newspaper ads are much more expensive than you might think.
- Transferable ownership Ownership in an LLC is harder to transfer than with S and C corporations. With non-LLC corporations, shares of stock can be issued to raise capital. With few exceptions, all owners of an LLC must approve in changes in ownership.
- Thinner case law precedent There’s less case law to guide lawyers and judges in legal disputes because LLCs haven’t been around as long as
other corporation types.
- Taxes There isn’t any magic trick that will make your tax liability disappear. LLCs are a pass-through entity for tax purposes. That’s true whether you opt to be taxed as a sole prop or an S corp. The income from your business is going to show up on your personal tax return.
- Limited Life While you can compensate for this in your LLC’s Operating Agreement, LLCs don’t exist independently of the individual owner’s of the LLC and will cease to exist once the owners die or leave the LLC. Other corporations continue to persist as a legal person even when there is a change in ownership.
Practical LLC Guide: How do I form an LLC?
Choose a Name for Your LLC
Believe it or not, there are actually some rules about naming your business, when you are forming an LLC. You cannot name your business the same thing as another LLC that is already on file with your state. The name of your business must end with the LLC designations, such as My Company, LLC.
There are also some words that cannot be used and are prohibited by the individual states. These include words like Bank, Insurance, and City. These word vary from state to state, so it is best to look up the rules for your state. You also want to make sure your business name is not violating an established trademark, so you don’t get sued.
You don’t have to register the name with your state, although you can if you are afraid that someone else will take your name before you have a chance to file your Articles of Organization. If you want to do so, you can usually “reserve” your business name for a short period of time, for a small fee.
If you don’t already have a name in mind for your business, you can use one of the many free websites that offer a free business name generator. Using one of those sites can ensure that you have lots of good business name ideas if your first choice is already in use.
File Articles of Organization
Formal paperwork must be filed with the state in which you are incorporating your business. This paperwork is filed with your state government’s LLC division, which is usually part of the corporation division within the Secretary of State’s office. Some states may call this paperwork a “certificate of organization” or a “certificate of formation”.
The filing paperwork is not very complicated; it can be as little as one page that includes the business name, address and the names of the owners, who are called members. One member is designated the Registered Agent, which means this person is the one chosen to receive any legal papers necessary in the future.
You will also have to pay a filing fee. In most states, this is not too expensive, around $100.> > Forming an LLC in your state: 50-State Guide < <
Create an LLC Operating Agreement
Your LLC Operating Agreement is usually required to create a business bank account, and it’s a critical part of your business formation and should not be neglected. This is the document where you lay out the ownership and government rules for your LLC, similar to a partnership agreement or a corporation’s by-laws.
Your Operating Agreement will lay out in detail the following information:
- Member names and percentage of interest in the LLC
- Member voting rights (in that, not all members may be assigned the same voting power)
- Member rights and responsibilities
- Allocation of profit and loss among members
- Definition of how the LLC will be managed
- Rules, for example, for holding meetings and taking votes
- Provisions for what to do if a member wants to sell, dies or becomes incapacitated.
That’s pretty much all you need to do to establish your LLC. In some states, you must publish a notice in your local newspaper, announcing that you have formed an LLC. If you have questions, you can contact your local newspaper; they will be able to tell you how it must be done.
Get Licenses and Permits
.Even though you have established your LLC completely, there may still be several additional steps, depending on your jurisdiction. You might need to obtain a business license, also called a “tax registration certificate”), a federal employer identification number (EIN, which you will get from the IRS), a seller’s’ permit, or a zoning permit.
You will have to check with your local and state business offices to determine which of these might be necessary.
Advanced LLC Topics
We wanted to create a LLC resource that even the most advanced business user could learn something from so we put together some LLC points of interest that didn’t fit well anywhere else.
Types of LLCs
- Domestic LLC If you formed and are operating your LLC all within one state, it is considered a domestic LLC. The state where you formed and are operating is the state that has jurisdiction over your LLC’s activities.
- Foreign LLC “Foreign” in this case does not mean a foreign country, it means a foreign state. So if you formed your LLC in one state, but are operating in another, you are operating a foreign LLC.
- Single-member or Multi-member LLC You can create an LLC with yourself as the sole owner and member. Or, you can have many members. In the case of only one member, your business is considered an SLLC, or Solo LLC. (Note that in the case of a SLLC, the IRS considers it a sole proprietorship for tax purposes.)
- Member-managed LLC Member-managed is when all members/owners participate in the LLC pretty much equally. Every member has the authority, as laid out in the Operating Agreement, to conduct business on behalf of the LLC.
- Manager-managed LLC If some of the partners are only investors and otherwise do not participate in running the business, then the proper structure is a manager-managed LLC. Anyone can be chosen as a manager, either a member or a non-member, and is responsible for the day-to-day operations of the business.
- Series LLC A Series LLC is an umbrella LLC that is formed across a number of LLCs. Each LLC has its own members, managers, business interests, etc. The advantage is that each individual LLC is shielded from all the others by this separation, and the advantage is that additional entities can be set up under the umbrella LLC without incremental cost . The series LLC was first created in Delaware and is now available in eight states: Delaware, Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas and Utah.
- Restricted LLCs This is a new type of LLC that is only available in Nevada. The restriction is in the way that the LLC is permitted to make distributions – no distributions are permitted until the LLC has existed for 10 years. This provides for favorable tax treatment for members. It also permits members to gift shares to a family member with no tax due for a particular period of time.
- L3C L3C stands for low-profit limited liability company, and refers to an LLC that has been set up for a philanthropic purpose. Profit is permitted, but it must be secondary to the L3C’s goals of social goals such as charity, education or other socially beneficial activities.
- Anonymous LLC Also known as an invisible LLC, an anonymous LLC is one where the state does not make the ownership information of the LLC available to the public. They are only available in New Mexico.
In today’s world, privacy and protection are the main reasons for wanting such a business structure. While these structures can provide that for the most part, you will not be able to hide your identity from:
- the IRS
- your banking partners
- any contracts with customers or suppliers that require a signature
- your landlord, if you rent space
- any courts
How do I pay taxes on my LLC?
The beauty of forming an LLC is that it is a business entity that provides the legal protection of a corporation with the tax advantages of a sole proprietorship or a partnership. Your income is not double-taxed, as it is with a true corporate structure.
The way you pay taxes depends on whether you are operating an SLLC (single-member LLC) or a multi-member LLC.
If you have an SLLC, you will pay taxes exactly as if you were operating a sole proprietorship business. Income and expenses are reported on your individual tax return using the Schedule C form, Business Income or Loss. The profit or loss is calculated there, and then brought over onto your 1040.
If you are part of a multi-member LLC, the LLC files a partnership return with the IRS, Form 1065. The LLC then issues K-1 forms to all of the members. The members’ shares of the profit or loss are calculated based on the ownership percentages as originally defined in the LLC’s Operating Agreement. Each member will then report the partnership income on his or her own 1040.
As previously discussed, you also have the option to elect to be taxed as an S Corp.
Amending an LLC
Your company grows and changes just like you do, and your state filing may need to change as well. However, you usually only need to amend your LLC filing when there are major changes to the Articles of Organization. This might include revisions such as changing the company’s name or address, removal or addition of members, or the company’s legal purpose (nature of its business).
If you just want to change the Operating Agreement, you usually don’t have to change the filing with the state. Changing the distribution of profits and losses among the members, or how the LLC is managed, does not require an amended filing with the state.
If you determine that your changes will require an amended filing, it’s a pretty simple process. Here’s how it works:
- Members must vote for the changes and the decision must be recorded. Some states may require that the vote be unanimous.
- Locate your state government’s Business Forms section and download the forms for amending your LLC registration. Some states require that all members sign, while some permit only one member to represent the LLC. Fill out all required information, including a description of the changes, and obtain the necessary signatures.
- File the form with the state and include the appropriate filing fee. Keep a copy of the amended filing with your LLC’s records.
- Publish the notice of amendment in your local newspaper, if required by your state.
It’s not as easy to dissolve an LLC as it is to set one up, unless you specified that your LLC was only for a temporary basis when you formed it. However, it’s not all that difficult, either.
- Members must vote to terminate the LLC. This may require a simple majority or it may require a unanimous vote, depending on your state and the terms you specified in your Operating Agreement.
- There must a written resolution of termination, dated and signed by all members who voted to terminate. A copy must be distributed to all members whether they voted for or against.
- Form 966 must be filed with the IRS within 30 days of the resolution. This form states that the LLC is no longer subject to federal tax filing requirements.
- Notify all creditors of the impending dissolution, and provide them with a way to submit a claim. There will be a deadline for making those claims, which will vary depending on the state in which your LLC is registered.
- Pay all creditors and any taxes owed. All known creditors must be paid before any of the LLC’s assets can be distributed to members.
- If it is required by your state, obtain a tax certificate that states that all tax obligations have been paid.
- Any remaining assets can now be distributed among the members, according to the original Operating Agreement or any subsequent agreement made among members.
- File a form with your state. It may be called Articles of Dissolution or something similar. This form will require the LLC’s name, effective date of the dissolution, and maybe the reason for dissolution. There may also be a filing fee.
- Prepare and file the final tax returns for your LLC for both state and federal obligations.
Can ZipBooks help me get a LLC setup?
Yes we can help. We have lawyers on staff that are experienced with LLC formation and we can do that for you. ZipBooks is your one-stop shop for all your business needs.
What are the costs?
We charge $150 setup plus the required filing and regulatory fees. Email us for more details.