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Limited Liability Corporations (LLC) are ideal for small businesses that are either established as a sole proprietorship or partnership. Being an LLC will provide small businesses the same legal protections that larger corporations are privy to, without having to sacrifice the ability to function as a small business.

What is an LLC?

Before making the change to form an LLC, it is important to know and understand what exactly an LLC is. An LLC is a type of business structure that combines the pass-through taxation commonly associated with a partnership or proprietorship with the limited-liability that is generally characteristic of corporations. Despite what you might think, an LLC is not a corporation. Rather, it is a legal form of a company that protects the owners by providing limited-liability.

Owner’s Protection

LLCs provide protection of the owner’s personal liability and assets. Simply put, a business’s debts, liens, lawsuits, and other financial obligations are limited to the business’s assets and not the owner’s. This only protects the owners from their business’s financial obligations, and not illegal acts or negligence committed by the owner of an LLC.

Pass-Through Taxes

An LLC is not considered to be a distinct entity when filing income taxes. The owners of an LLC are responsible for reporting profits and loss on their personal income tax returns, and paying accordingly. This is similar to how tax reporting is conducted for sole proprietorship or partnership businesses. No tax return is filed on behalf of an LLC.

Setting Up An LLC

Setting up an LLC is an easier process than that of forming a corporation. It is a multistep process that consists of various steps, such as, selecting a business name, establishing registered agents, and other required components. The process of establishing an LLC might look something like this:

Selecting A Business Name

Each state has requirements that must be adhered to when selecting a name for your new LLC. The first thing to be aware of when selecting a name is that you need to select a name that is not already taken by another LLC in your state. Your state will let you know if your selected name is acceptable or not.

Secondly, state regulations may dictate that “LLC”, or “Limited Liability Corporation”, appears in your business name. Depending on the state, there may be other regulations that need to be adhered to when forming an LLC.

Articles of Organization

This is the official document that establishes your LLC. The name of the document may vary from state to state, but they are all serving the same purpose. This document will require information about the LLC, and depending on your state, there might be a standard form where you’ll be allowed to fill in the blanks. Typical information found on the form include the LLCs name, address, and the names of the owners. Some states will require each owner to sign, while others only require a signature from one of the owners.

Registered Agent

A registered agent is an individual who acts on behalf of the LLC. This individual is required to be accessible at a physical street address during business hours, and can legally accept legal documents relating to lawsuits brought against the LLC. The registered agent is typically an owner, but does not have to be one of the owners.

Payment of Fees

Depending on the state that you are forming your LLC in, the fees required to register your LLC with the state can be as little as $100 in some states, to a couple of hundred dollars in other states.

LLC Operating Agreement

This step is the most complicated part of the whole process, but it is not a requirement to be filed with the state. Even though it is not a requirement, it is highly recommended that you create one in order to avoid conflicts later on.

This can be a really simple document that does not require the assistance of an attorney, but consulting an attorney when multiple owners are involved is never a bad idea.

An operating agreement is really similar to that of corporate bylaws and partnership agreements. The purpose of the document is to spell out the rights, responsibilities, voting powers, percentage interest in the business (including division of profits and losses), scheduling of meetings, and other various tasks required. A very detailed operating agreement can be broken down into details concerning management responsibilities between various owners.

An operating agreement can be as simple or as detailed as you need it to be. It is a good idea to have all of the details ironed out at the beginning, so that when potential disagreements arise between owners over management or ownership, there is already a document in place that both parties have previously agreed to.

If you feel that the decision to form an LLC is the best option for your small business, Silver Shield Services can help you get started. Contact us today to learn how we can help you get your LLC registered, so that you can start operation as soon as possible!