Starting a LLC
By Nick Braun EA PhD
Introduction
LLC stands for Limited Liability Company and the owners are called members.
The LLC is a relatively new type of business structure. It was only in 1996 that most states had recognized them.
LLCs have become extremely popular because they offer three major benefits:
- They’re simple to run and very versatile
- They offer extremely flexible tax treatment
- They provide the maximum liability protection
For these reasons the LLC is the entity of choice of many tax pros and attorneys, especially those advising small business owners.
Setting Up Your LLC
- Until recently some states did not allow one-member LLCs. These are now allowed in every state.
- Converting a sole proprietorship or partnership into an LLC is a ‘non-taxable event’ – no tax has to be paid when you make the change over.
- LLCs are set up by filing articles of organization with your Secretary of State and paying the state fee. The articles are usually simple to complete and contain only basic information such as the name of the business and what it does.
- You can set up your LLC yourself, for example by using a do-it-yourself book or software. There are also websites that will do everything for a small fee. For example, mycorporation.com’s charges start at around $150 plus state fees. State fees range from $50 to over $500.
- Each state has different rules for LLC formations. Some states such as New York require you to publish a notice of formation in a local newspaper. This could cost a few hundred dollars.
- Most states also require you to name someone as the company’s ‘registered agent’. This is a physical address where tax notices and legal documents can be delivered.
You can either act as your own registered agent or there are plenty of service companies that will take on the job for a small annual fee. Hiring an outside party protects your privacy and ensures there is always someone available to perform this duty.
- So which is cheaper to set up: an LLC or a corporation? In some states LLC formation and renewal fees are more than for corporations but in most states an LLC is the cheaper option.
However, in many states the saving comes to less than $100 so this will probably not be the most important factor when choosing your ideal business structure.
The Operating Agreement
- Every LLC should have an operating agreement. Like a partnership agreement the operating agreement sets out the LLC’s internal rules and the rights and duties of the managers and members.
- It’s not a requirement in most states but is highly recommended. Even single member LLCs should have an operating agreement. This may seem strange because why, after all, would you need rules to tell yourself how to act?
The reason is an operating agreement shows the outside world that you take the management of your business seriously and makes it look less like a sole proprietorship. This might help you if someone tries to argue that you and your LLC are actually one and the same. A creditor might do this to try and “pierce the veil” of limited liability and come after your personal assets.
While most aspects of an LLC are easy to set up using DIY guides and software this is where getting legal advice is probably worth the money. There are lots of clever provisions a good attorney can include in the operating agreement to protect your against almost every eventuality. Operating agreements can also be used to override certain state laws.