What is an LLC: Do I Need One and How to Create One

Whether you are a new business owner or an established one, you must have come across the word LLC. Have you always wondered about the meaning of that word, whether you will ever need it for your business? Are you familiar with the word, and do you need clarification on how to create it for your business? If you are in any of these situations, this guide is meant to answer those questions. At the end of this guide, you will understand the meaning of LLC, its benefits, and how you can go about creating it.

What Does LLC Mean?

LLC stands for limited liability company, and it is a legal business structure in the United States. It helps treat a business and its owner as a separate entity, meaning the asset of its owner is protected. Having an LLC means the owner cannot be held responsible for the company’s debts and liabilities. Limited liability is also known as a hybrid entity as it combines the characteristics of a sole proprietorship and a corporation. Also, limited liabilities enjoy pass-through taxation, so they don’t pay tax at the business entity level but are based on the income tax returns of the owner.

Do I Need an LLC?

Registering your business as an LLC has a lot of advantages, so whether you need one or not will depend on whether these benefits are relevant to your business. These are a few reasons you should consider an LLC for your business:

Limited Liability

As the name implies, there are limited liabilities for the members (LLC owners). LLC protects the personal properties of the owners against any liabilities or debts incurred by the business. This is one of the characteristics an LLC shares with a corporation. Creditors cannot ask that the personal assets of the members be used to settle any business debts. This is different from sole proprietorship or partnership, where personal assets can be pursued to settle debts incurred by the business.

Taxation

While members are considered separate entities from the company, it does not apply to tax. The IRS does not tax the company on a corporate level. Instead, it taxes the personal income of its members. It is called pass-through taxation, and any tax is paid at the individual level.

Brand Credibility

Creating an LLC for your business is one of the ways to increase credibility. Aside from other benefits of having an LLC, you will be able to get your business off the ground, and it also becomes easier for customers to trust you.

Ownership

There are no restrictions on who becomes a member of a limited liability company. Whether individuals, trusts, corporations, or groups of individuals forming partnerships, there are no restrictions. Plus, LLCs can have any number of shareholders.

How to Create a Limited Liability Company?

Each in the United States has its requirement for creating an LLC. However, this guide will help you streamline the forming process irrespective of your state in the US.

Choose a State

Which state do you plan to form your LLC? It would be best if you decided on this earlier because each state has its requirements. The laws of the LLC, annual report fees, formation fees, and taxation are different from state to state in the United States. Most of the time, business owners choose to register in the state in which they are a resident. However, you can decide to register in states where you are not a resident. You only need to get yourself accustomed to the state’s legal requirements for creating an LLC.

Business Name

Understandably, you are eager to get your business registered to begin a full-fledged business operation; however, the name is also important. This is because each state has requirements to guide your business name. Plus, you don’t want to center your LLC creation effort on a name that another business has registered.

Therefore, your first step to creating an LLC is reviewing your state’s requirements and also checking the website to ensure the name is still available.

A Registered Agent

A registered agent is someone responsible for receiving official or legal documents on behalf of the limited liability company. It is in the law requirement of all states in the US that every LLC must have a registered agent. You can stand as a registered agent for your business or choose your employee as an agent. As long as they are more than 18 years old and live in the same state as your business, they are eligible as your registered agent.

For the best interest of the business, ensure the registered agent is familiar with state laws. In addition, you can employ a registered agent service to fulfill this responsibility.

File Article of Organization

This is also known as the certificate of formation in some states. Every state has this form, which is used to establish your limited liability company as a legal entity. In addition, the requirement is different from state to state. Basic requirements will include:

• Business name
• The principal location of your business
• Name and location of your registered agent
• Business purpose
• How your LLC will be managed

Keep in mind you will also need to pay a filing fee before submitting this article of organization. The fee is also different according to each state.

Operating Agreement

Creating an operating agreement is not a compulsory requirement for creating an LLC in all states. However, you should create one for your business. An operating agreement contains information on how you decide to run your business. What are the legal, financial, and management rights of all members? How will the profit be distributed? Where is the business capital coming from? Answers to these questions will be provided in the operating agreement.

Get an Employer Identification Number (EIN)

The EIN is important as it helps ensure you and your business are a separate entity. It is the first step to protecting your assets. Next, you can now open a business account for your LLC.

Annual Reports

Filling annual reports is required by LLCs in most of the US’ states. It is also a way of keeping your LLC active; you need to update information about your LLC. It also comes with a filing fee.

Register in Other States

If you create an LLC in a state where your business does not operate or you want to extend your business operation to other states. You will need to register your LLC in that state and also designate a registered agent.

Other requirements

Depending on your business, you might need business and professional licenses. Also, you will need to register with the appropriate taxing authority in that state.

Conclusion

Now that you understand what an LLC means, why you need one, and how to create it for your business, you can get your business started. Creating an LLC for your business is a way of making it official and legal. The law of your state will protect you and also give you access to different business opportunities. So, if you ever ask yourself whether you need an LLC or not, this guide is an answer to your question.