Before You Start LLC These Are The Things You Should Know

Creating an LLC can help you develop your business while protecting your personal assets. Additionally, LLCs are the most widely used corporate structure for small firms in the US since they are simple to set up and manage.

The seven most crucial details to be aware of when forming an LLC are covered in this article.

Information to Consider Before Forming an LLC

An LLC is simple to create. But what should you be aware of first?

We’ve compiled a list of items that many business owners say they wish they had known before forming their first LLC:

1. You’ll need to give your LLC a distinctive name.

Most states mandate that names of registered businesses be “distinguishable” from those of other firms in the state. In essence, this means that there should be a distinct difference between each business name.

Because of this, it’s advisable to start considering a name for your LLC as soon as you can – before another company can claim it. Even if you aren’t yet prepared to establish an LLC, the majority of states provide the option to reserve a company name for a specific length of time for a reasonable cost (often under $50).

Recommended: Unsure of the name for your company? Consider using our LLC Name Generator.

To ensure that your LLC name is original and complies with state naming regulations, you must conduct an online search for business names.

Once you’ve decided on a name for your company, it makes sense to sign up for a web domain. GoDaddy is our #1 pick for web hosting and domain registrars. We enjoy their domain search feature because it allows you to look for a certain name or generate suggestions based on available names and keywords.

2. A Registered Agent Is Required

The majority of states demand that LLCs have a registered agent. A person or organization who consents to be accessible to take service of process (legal summons) on behalf of the LLC is known as a registered agent. The LLC’s state must have a resident registered agent.

Although it is feasible for a business owner to serve as the registered agent, doing so can be quite inconvenient (registered agents must be accessible at the registered office from 9 a.m. to 5 p.m., Monday through Friday) and may raise your risk of compliance problems.

Therefore, we often advise using a registered agent service. Using a registered agent service has a number of advantages, such as:

• adherence to the law
• calmness of mind
• Flexibility
• Privacy

Remember that some LLC formation services include a free registered agent service as part of their package. If you’re short on time or even just a little concerned about the procedure, using an LLC formation service might be an excellent choice.

3. Operating Agreements Should Be Required for All LLCs

Although operating agreements for LLCs are generally not mandated by state law, having one is always a good idea. There are a few strong reasons to establish an operating agreement, even if you’re the sole member or your state doesn’t require one, including to:

• Maintain the limited liability status of your company.
• strengthening member agreements
• Stop letting the government manage your contracts.

It might be intimidating to create an operating template, and you might be tempted to get assistance from a lawyer. However, you may make one on your own using free operating agreement templates and avoid paying any more money to your beginning fees.

4. You must immediately establish business credit.

A business owner with business credit has access to money that can be used to finance expansion. When a company is just getting off the ground, it has to build credit in order to later be authorized for small business loans.

According to a National Small Business Association poll, one-fourth of small business owners said that they were unable to expand their operations due to a lack of finance. Not unexpectedly, it was shown that business credit accounts for 20% of loan denials for small businesses.

Fortunately, establishing company financing is not difficult—but it IS crucial.

Applying for a net 30 account and a secured company credit card with a lender like Divvy is a good place to start.

You can expand your firm by taking advantage of these options for simple approved credit building.

Read up on how to quickly establish company credit.

5. An EIN Is Required for Your Bank Account

All LLCs, including those with one or more members and workers, must get a free Employer Identification Number (EIN) from the IRS.

Although it’s not technically necessary for single-member LLCs without employees to have an EIN, it’s nevertheless a good idea to obtain one as soon as the LLC has been registered with the state. This is so that you may open a business bank account, which most banks require you to do.

6. Tax Options Are Available.

You have some flexibility with the company’s tax structure, which is another advantage of an LLC.

A one-member LLC is by default categorized as a “disregarded entity,” but a multi-member LLC is viewed as a partnership. In both of these scenarios, the LLC is subject to pass-through taxes, in which the profits of the business are taxed on the owners’ individual tax returns rather than at the corporate level.

Additionally, LLCs have the choice of being taxed as either a C company or a S corporation (S corp). Depending on your business, each of these categories may offer advantages and disadvantages.

Knowing your alternatives in advance helps ensure that you choose the best solution for your company, saving you time and money in the long run. For additional information, see our How to Choose Your LLC Tax Status guide.

7. Establishing an LLC Won’t Draw Venture Capitalists or Investors

The optimal structure for your small business isn’t an LLC if you want to draw in investors. This is due to the fact that an LLC investor would be obligated to pay taxes on LLC profit whether or not they received a payout.

The greatest option for firms that need venture money or other sorts of investors is to form a corporation. Corporations are subject to two different levels of taxation: business level and shareholder/investor level. This type of double taxation can be detrimental to business operations when investors are not involved. LLCs were developed in order to ease this load.

Formation of an LLC

An LLC is simple to create. There are two ways to create an LLC:

You can choose your state from the list below to start an LLC on your own, or you can pay a professional LLC formation service like Northwest a modest fee to set up your LLC.

First, choose your state.

The ideal choice for the majority of first-time business owners is to create an LLC in the state where they already reside and intend to operate their company.

Step 2: Choose an LLC name

When you file your LLC’s formation documents, you must provide your state a distinctive name that can be distinguished from any other registered names.

For entrepreneurs who need assistance naming their business, we provide two free tools: our business name generator and our How to Name a Business guide.

Step 3: Select a Registered Agent for an LLC

Legal paperwork and tax notices will be accepted on behalf of your LLC by your registered agent. When you submit the Articles of Organization for your LLC, you must designate a registered agent.

Privateness and peace of mind are two advantages of using a registered agent service.

Step 4: Submit the Articles of Organization for Your LLC

The document you will submit to the state in order to formally register an LLC is known as the Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization in some states.

Create an LLC Operating Agreement in Step 5

A legal document known as an LLC operating agreement describes the ownership and member responsibilities of your LLC.

Get an EIN in Step 6

The US Internal Revenue Service (IRS) uses an EIN number to track down and tax firms. It functions as a business’s equivalent of a Social Security number.

Frequently Asked Questions for LLC

What should I be aware of prior to forming an LLC?

Before forming an LLC, there are seven things you should be aware of. These include information on your LLC’s name, registered agent, operating agreement, tax implications, EIN, limited liability protection, and how to keep your corporate veil in place.

Is it worthwhile to form an LLC?

It usually pays to invest the time, money, and effort into forming an LLC. See our post on the 7 Advantages of Forming an LLC.

How challenging is it to form an LLC?

It’s not difficult to create an LLC, and you can typically do it without consulting an expert. Our state-specific How to Form an LLC tutorials offer detailed steps.

How are LLC owners compensated?

The tax treatment of the LLC, the number of members, and any arrangements for profit sharing and sweat equity will all affect how LLC owners are compensated. You can pay yourself through a single-member LLC or a multi-member Colorado LLC guide.

A payout that is reported on your personal tax return, or a fair wage and distribution made by a S business (S corp)

What are the drawbacks to an LLC?

The inability to draw investors as easily as a corporation is one disadvantage of an LLC. This is something to bear in mind if you anticipate ever needing outside investors.

Owning an LLC qualifies as self employment, right?

Yes, LLC owners are regarded as independent contractors unless they choose a corporation tax structure. By default, LLC owners are required to pay self-employment tax.

Does establishing an LLC make taxes easier?

Although becoming an LLC gives business owners more tax planning alternatives, it does not guarantee lower tax bills. In actuality, pass-through entity single-member LLCs that are taxed at the same rate as sole proprietorships pay the same amount of taxes.