By: Aaron Young
Forming a Limited Liability Company (LLC) for your small business can be a very simple process, but don’t forget to consider a few important things before you do so. Make sure to outline: who are the members going to be, what will you accept as consideration for buying interest in the LLC, and how will the LLC be managed?
Before forming an LLC be sure to account for the business laws in the state in which you wish to operate. Research these laws before you make a crucial error, or contact a professional to secure a solid foundation for your LLC.
When choosing a company name most Secretary of State websites allow you to research if the name you want is available. No one else in the state can already have the name that you want. If your name is taken sometimes just altering the name slightly will make it available. Also, when you designate a name be sure to include LLC or LTD at the end of it.
LLCs are made up of members who act in a similar capacity to shareholders in a Corporation. Anybody can be a member of an LLC and there can be one member or multiple members, it’s really up to you. Members buy interest in the LLC with cash, property, services, or the promise of payment. In exchange, the members receive ownership interest.
There can be different designations of members based upon active decision makers or passive investors. If the LLC is managed by its members then it is considered “member managed.” If the LLC chooses to hire an outside manager or designates the position to a member, then it’s considered “manager managed.”
How the LLC is managed usually depends on the long term outlook for the company. If you’re planning to only allow a few people to participate in the LLC and you’re all on the same page, then you might want to elect “member managed.” If you operate multiple ventures out of one company with active and passive investors then you might be better off hiring a professional manager or electing an active member to be the manager to avoid any unnecessary conflict.
Articles of Organization
The Articles of Organization is a form you file with the state of the LLC’s formation. The Articles of Organization contains the names of the members and/or manager, the business address, and who the resident agent will be. The resident agent is the location where any legal documents for the LLC can be delivered. In most states you can be your own resident agent or you can hire a service for this (recommended).
One of the first things you need to develop after you file your Articles of Organization is the Operating Agreement. Although Operating Agreements are not required by all states, it’s important to create a working document that fits the needs of the LLC. The Operating Agreement outlines the inner workings of the LLC including: ownership, management, distributions, and who has voting rights.
Federal Tax Classification
One of the great flexibilities of an LLC is the ability to select how you want the entity to be taxed. If you are a single member LLC, the IRS will automatically tax you as a partnership, which means any profits/losses will flow through to you personally. You can also be taxed as a Corporation, making the LLC its own taxable entity, and you’ll pay taxes on dividends and/or salary received from the LLC.
The steps you take to establish the foundation of your company is very important and should be carefully thought out for the present and future goals of the company. It’s vital that you consider where you see the company in 5, 10, or 20 years from now.
Some people jump into forming a business entity without realizing that there is more involved than just filing a form and putting a sign up. You are forming the entity for the additional liability protection the LLC provides, so take the time to do it right.
Aaron Young, CEO, Laughlin Associates, Inc.email@example.com