Forming a new company can be a rewarding journey. However, some business owners get confused with the type of business structure they want to go by. Should they register as a company? Or start as a sole proprietorship?
The National Small Business Association (NSBA) found that 35% of U.S. businesses were registered as LLCs. More recently, census.gov reported that “Business Applications for July 2022, adjusted for seasonal variation, were 425,698, an increase of 3.7% compared to June 2022.”
Is it safe to assume that LLCs are the better choice when setting up a business?
Truth is, every business structure has its pros and cons. However, an LLC will offer business owners more protection in terms of personal responsibilities relating to debts and liabilities.
So, what is a limited liability company (LLC)?
Simply put, LLCs are organizations that combine the characteristics of a corporation with those of a partnership or sole proprietorship.
The biggest advantage of an LLC comes from being a ‘limited liability’. It protects the owner’s personal assets from creditors in cases where they can’t pay their debts. What’s more, LLCs have flexible tax options such as ‘pass-through taxation’. This is a process where LLCs can forgo paying corporate taxes but instead pass profits through the owner’s income.
If you’re forming a new company and are thinking of becoming an LLC, here’s a handy checklist you can use to successfully register your business.
Choose a business name
The name of your business plays a vital role in the success of your business. It separates your business from competitors and gives your business an identity. Your business name is the first thing your customers will see. Keep it simple and make sure it grabs your customer’s attention.
To help you craft the perfect business name, here are some tips you can use before forming a new company:
- Consider the brand’s global shelf life
- Gather input from international customers
- Research your competitors
- Follow state laws on how to name a business
- Understand the SEO landscape
- Search for trademarks
- Ask for feedback
* Note: An appropriate designator, such as “Limited Liability Company” or “Ltd. Liability Co.”, at the end of the business name is required in most states.
Select an LLC management structure
Now that you have a name, it’s time to choose your management structure. An LLCs organizational structure is more modern compared to corporations. LLCs are managed by individuals who each have an ownership interest in the company. A management structure for an LLC can either be member-managed or manager-managed.
Every business will always have its own specific needs. Here’s a list of the pros and cons of each type to consider before forming a new company:
- All members have equal say in the decision-making process of the business
- Suitable for LLCs with only a few members
- Members have to work together in running the business
- More difficult to attract investors
- Attracts more passive investors
- Limits the management to a small group of reliable people
- Managers can make simple and swift decisions
- Cuts the owner’s decision-making power
- Tasks and duties of a manager need to be perfectly outlined
- The cost to hire a manager may be too much for a startup
Hire a registered agent
As you already know, the biggest roadblock in starting a business is making sure all legal requirements are followed.
Every business is required to have a registered business agent. These professionals serve as the business’s mediator. They will take care of all your legal documents and ensure you don’t suffer any avoidable fines or penalties. What’s more, hiring registered business agents makes it easier for you to scale your business as you expand to other locations.
Submit your articles of organization
Every state requires LLCs to submit a document called ‘articles of organization’. This document goes by different names. Some states call this document a ‘certificate of formation’ or a ‘certificate of organization’.
Filling out this document won’t take much of your time. You’ll only need to list basic information about your business such as:
- Name of your registered agent
- Members of the LLC
- Business name
- The management structure of your LLC
* Once the document is approved, the state will then issue a certificate to indicate that your LLC is officially registered.
Think about how you’ll operate your business
Another legal document LLCs need to fill out is how the business operates. This document includes pertinent information about the operations of your LLC.
For some states, an operating agreement is optional. However, states like California, Delaware, Maine, Nebraska, and New York legally require businesses to have an LLC operating agreement.
Some of the information to include in an LLC operating agreement are the following:
- Organization of the business
- Management and voting
- Board of managers
- Distribution of profits and losses
- Capital contributions
Acquire an Employer Identification Number (EIN)
An EIN serves as your business’s federal tax ID. It’s required in applying for loans, hiring employees, and ensuring your business is legitimate in the eyes of the IRS.
Any company that meets the following criteria is required to file for an EIN:
- Has more than one member
- Files excise tax
- Hires employees
- Withholds taxes for non-wage income paid to a nonresident alien.
* After forming a new company, if it has to be converted to a different business structure you’ll need to file for a new EIN.
Moving forward once you’ve formed a new company
Now that you’ve submitted all the requirements to be a legitimate LLC in the eyes of the state, what’s next?
The first step is to acquire the necessary permits and licenses. All states require different permits and licenses to legally operate as a business. To be safe, it’s best to visit your state’s local website for the latest updates.
Next, open a business bank account. This will keep all of your personal and business transactions separate. The last thing you want is to face a lawsuit that puts your personal funds and property in jeopardy.
Once that’s settled, you need to have a contingency plan. Disasters come when you least expect them, so it’s best to get business insurance right away. This will protect you from lawsuits, property damage costs, and of course, it will limit financial losses.
When you start your own business, the decisions you make from the get-go can be make or break. Simply choosing the right business structure can mean the difference between success and failure.
If you’re forming a new company and are incorporating as an LLC, here are some steps you need to remember:
- Think of the perfect business name
- Choose an LLC management structure that fits your needs
- Hire a registered business agent
- Take time to craft your articles of organization
- Think about how you’ll operate your business
- File for an Employer Identification Number (EIN)
- Acquire the necessary permits and licenses
- Open a business bank account
- Secure business insurance
*Featured image source: Unsplash