Forming your company in the US is a vital aspect of doing business with success. As various business structures have unique operational features and tax requirements, choosing the right company type is essential before proceeding with your business formation. In addition, the right company type depends on various factors, such as the investment sector, the number of investors, personal business plans, and financial aspirations. In that regard, it is extremely critical to be knowledgeable about the US business structures to guarantee your company's safety and success eventually. The most common company types in the US are Sole Proprietorship, Partnerships, Corporations, S Corporations, Limited Liability Company (LLC), and Professional Limited Liability Company (PLLC) as listed by Internal Revenue Service (IRS). In this writing, we will be exploring LLCs and, step by step, the process of forming an LLC company in the US.
What is a Limited Liability Company?
LLC is one of the newest company types in the US, with various personal benefits and tax advantages. LLC offers its owners or board members the personal liability exemption, which protects owners’ or board members’ personal assets from confiscation in case of bankruptcy or lawsuits. LLCs are also exempt from double taxation. This means that LLCs do not pay corporate taxes, but instead, their owners or board members are individually taxed via their share of profits of LLCs’ total income. Hence, LLCs might be a fit choice for individuals with substantial personal assets that they want to protect and/or want to pay less tax rate than a “C type” company.
What is the Process of Forming an LLC?
The process of forming an LLC has many steps that need close attention and professional guidance. The number of steps might differ from source to source depending on the subjective interpretation of the requirements’ importance. Here below, we specified seven steps that you must take to form your LLC:
- Selection of business location
- Selection of business name
- Registration of business
- Obtaining federal and state tax IDs
- Application for licenses and permits
- Opening a business bank account
Selection of Business Location
The state and local area where your LLC will be formed is essential. Selecting the LLC location depends on several factors, and each factor’s importance should and will be weighed according to your business aspirations and preferences. But there are expected costs/benefits points you should consider while deciding on your business location.
Business expenses are unique to specific areas that might adversely impact your business inception and short-term growth. These might be state-wide or locally governed regulations or related to the economic conditions of states and local areas. Government-regulated expenses can be minimum wage laws, standard salaries, tax requirements, and the costs of government licenses and fees. Region-specific business expenses as results of locations’ economic conjuncture are expenses such as rental rates, property values, utilities, etc. In that regard, making a well-thought articulation of the costs/benefits of your business’ location is fundamental for a successful financial venture.
Selection of Business Name
Selecting your business name means deciding on the representation of your brand identity. Hence, it is crucial that you choose a name that will become an embodiment of your products and services. Though the rules regulating naming an LLC differ from state to state, there are common ones that apply to all states. Generally, your business name must end with LLC or its alternatives, such as Limited Liability Company or Limited Company. The selected business name cannot be the same as the name of other already established LLCs.
Registration of Business
Business registration makes your company legal to conduct lawful business operations. For your LLC, you will need to register your business with the state where you are forming your company. On the other hand, before registering your business, you must have a registered agent who (RAs can be individuals) or who (RAs can be companies too) will receive official papers and legal documents on behalf of your company. You will register your business with the state by filing certain required documents such as articles of organization and LLC operating agreement.
- The article of the organization is a document that makes a broad definition of your LLCs operational basics.
- LLC operating agreement describes the structure of your company’s financial and functional decision-making process by detailing the hierarchy of employees, their duties, and roles
It is necessary to note that not all states require you to file an LLC operating agreement. Therefore, you should proceed according to your company’s state rules while registering your business.
Obtaining Federal and State Tax IDs
Federal and State tax ID numbers, or Employer Identification Number (EIN), will enable you to pay your required federal and State taxes, open a business bank account and apply for business licenses and permits. On the other hand, it is essential to mention that not all states have income or employment tax with which LLCs are taxed at the state level. Therefore, you should research the company taxation rules that your company’s State has and proceed with your State Tax ID application accordingly.
Application for Licenses and Permits
Depending on the business sector in which your company operates, you will need to have specific federal & state licenses or permits to conduct your business operations.
Federal licenses and permits are required if a US federal agency regulates your business activities. See if your company’s business activities are needed for federal licensing or permits. There are various industries for which state licenses or permits are required. On the other hand, whether you need state licenses or access at all or industry requirements vary by state. It would help if you researched your state’s regulations to learn about your potential licensing or permit requirements.
Opening a Business Bank Account
Opening a business bank account is the last step before starting your overall business operations. Opening a bank account is crucial as it provides essential business professionalism, legal compliance, and financial advantages such as increased purchase power. There are several standard documents that you should make ready before applying for a bank account:
- Employers Identification Number
- Ownership Agreements
- Business License
- Business Formation Documents
Forming LLCs is a long and confusing process that entails various steps with many requirement nuances varying according to states and local governments. All seven steps require exhaustive legal research and meticulous road planning for a smooth, risk-free business formation process. Grape Law has the business expertise and legal foresight to provide you with a formation process and help you initiate your companies with a sound and safe foundation.
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