Up to 53% of small businesses are sued within a given year.
And no matter how hard you try to do everything right in your small business, it’s impossible to completely avoid making mistakes that could land you a lawsuit.
One of the best ways to protect yourself and your business is by learning how to start an LLC or Limited Liability Corporation.
An LLC means that your business is a separate legal entity from you. LLCs come with numerous benefits, from giving you tax benefits to protecting your personal assets such as your car and house if you get sued.
But rushing into an LLC can prove costly in the long run if it’s not right for your business. So before you set up your LLC, here’s everything you need to consider.
Table of Contents
Decide on the State and Name
LLCs are based on state laws, so the first thing you need to think about when starting an LLC is which state you will file in.
A good rule of thumb to follow is to form your LLC in the state where your business will operate.
And when deciding where you want to operate, you want to consider where your target audience is. This is more important for brick-and-mortar businesses.
Remember that each state’s laws are different when it comes to LLCs, so do your research on each once you’ve narrowed down your choices to a few states.
LLCs also have naming conventions. First of all, the company name should end in “LLC.” It also can’t have words that are forbidden by the state you’re filing in. These words can include:
- Bank
- Trustee
- Insurance
- Incorporated
- Corporation
For words like “insurance,” you can’t use these names unless you are actually an insurance company. You also can’t say you are incorporated if you’re not.
Don’t say anything misleading in your LLC name, either. An example would be putting the word “cars” in your LLC name when you actually sell phones.
You also want to keep your LLC name short, simple, and easy to read.
The LLC Company Structure
LLCs are flexible and easy to run, so they’re popular for businesses whose risk is medium-high.
This risk refers to anything that has a high degree of uncertainty or hazards where you as the owner would be liable. For example, businesses that fit into this could be medical offices, accounting or bookkeeping firms, or renovation contractors.
Even if you’re a new company, you may need to form an LLC right away if your business has a high degree of risk from the start.
An LLC is not right for you if you plan on getting investors for your business in the future.
This is because you need to have the option of having a public structure with shareholders so you can conduct an initial public offering (IPO).
Member Turnover
If you’re not starting the LLC by yourself, you may end up with different company members than you did when starting a company.
These consequences vary by state and are very important to know. For example, if a member of your LLC goes bankrupt, passes away, or leaves the company, then the law may require you to dissolve the LLC.
Plus, the members of the LLC that are left behind will be responsible for handling the legal and financial obligations for closing the business.
If these remaining members still want to do business together, they’ll have to start a brand new LLC.
Your Operating Agreement
Your LLC operating agreement customizes the terms of your LLC. This will be according to your specific needs as the owner (and of your partners if you are in a partnership).
This agreement also outlines how you’ll make financial and functional decisions in your LLC.
An operating agreement may or may not be mandatory depending on which state you file your LLC in. But having this document should be part of your business plan whether or not the law requires you to have it.
If you don’t and you come into disagreements with your partners or another entity, then your LLC has to be run according to the default rules of the state.
But if you have your own operating agreement, then your LLC will be run according to the internal rules you specified in the agreement.
Tax Structure
One of the best parts of the flexibility of LLCs is that you can choose between four different tax structures. These are:
- Sole Proprietorship
- C Corporation
- S Corporation
- Partnership
If it’s just you operating the LLC, you can choose to be taxed as a sole proprietorship or as a corporation.
If your LLC has more than one member, then you will be taxed as a partnership.
Required Permits
An essential part of your business strategy is knowing what permits you need for your business to legally operate.
Depending on the type of business you have, you may need a local, state, or federal license. You may also need more than one of these licenses.
For example, you need a federal permit for businesses that:
- Do broadcasting
- Give investment advice
- Deal with tobacco, firearms, or alcohol
- Deal with meat or drug manufacturing
And if you’re planning on buying and selling items as a resale business or trader, then you need to get a Seller’s Permit or Trader’s License. You also need to apply the right sales tax according to your state’s laws.
Know the Basics of How To Start an LLC
An LLC can be one of the best ways to give you peace of mind knowing that your assets are protected while giving you great perks like taxation benefits.
But no matter how good this sounds on paper, knowing how to start an LLC will be vital in deciding whether this legal structure is right for your business.
If you found this article helpful, then be sure to check out the rest of our site for more business and finance tips and tricks.
