If you’re a novice entrepreneur with an idea that could become the next Facebook, then starting your own company is exciting. With so many concepts flowing around in your head, the thought of being your own boss is even more appealing. Unfortunately, it can also be overwhelming and stressful when you start to think about the details of forming a limited liability company (LLC). A few key points should be considered before diving head-first into this process.
1. The Cost Of Forming An LLC
The first thing you should know about forming an LLC is that the cost to do so varies depending on your state of residence, as well as how much you plan to raise for your company. The state filing fees can range anywhere between $40 to $500, which isn’t so bad considering this is the main cost of forming an LLC. The three main ways to do this are through a professional LLC service provider, a lawyer, or you could do it yourself. It’s important to note that while practically all states have a flat initial fee, some have additional annual, or biannual fees as well.
Other costs may include business licenses and permits, and a fictitious name fee. However, these may not apply to every business – again, depending on where your LLC would be located, but also on whether or not your company is related to an industry that’s liable to those fees, or if you want to run a business under a different name.
2. LLC Operating Agreement
Creating an operating agreement as a limited liability company is perhaps one of the most important things you should know about forming an LLC. The reason is, if not done correctly, your limited liability benefits could be invalidated by a legal court. An operating agreement is not required by the state, however, it is strongly suggested that you draft this document to clearly define how your LLC operates. This includes details about ownership percentages, what happens in the event of a member’s departure or death, distribution of profits and losses, etc. While it may seem redundant at first, you never know how things might develop in the future, and it’s much better to be safe than sorry.
Disagreements among members are bound to happen, and an operating agreement can help resolve those disagreements in a more civil manner. It can also protect the LLC from potential legal issues that may arise in the future, which could make or break a business.
3. Registered Agent
Forming an LLC means that your business will need a registered agent, no matter what state you’re in. A registered agent is a person or business (that meets specific requirements) who is legally responsible for accepting service of process on your company’s behalf. This means that any court documents, lawsuits, or official government orders will be served to this person. If the registered agent fails to accept it in a timely manner, they’re liable to pay the legal fees associated with it.
You don’t need special training to become a registered agent. As long as a person is of age, they can be registered as one. Some states require that the registered agent have a physical address within their state of residence, but not all. All that’s required is that the agent in question is available during business hours at an address within the state the LLC is located in. Hiring a company as a registered agent does have its benefits, but it’s important to note that it comes with additional costs as well.
4. Taxation
There are two different types of taxations for both single and multiple-member LLCs: disregarded entities and pass-through taxation. In a nutshell, if your business is taxed as a disregarded entity, you will be taxed as a sole proprietorship or a partnership. An LLC is taxed differently than any other business structure. Most companies are taxed as sole proprietorships, meaning all profits and losses are reported directly by the owner on their personal tax return.
With an LLC however, income and loss will be reported by the members on their personal tax return, meaning you can deduct any losses in your profits. This allows for a little more freedom when it comes to business planning – your LLC could lose money one year, but gain massive profits another without having to worry about paying additional taxes.
You, however, will not be taxed as a separate entity, and income and losses for your business will be reported on the Schedule C form of your personal taxes. If you choose pass-through taxation, your LLC will be considered to be an S corporation by the IRS (Internal Revenue Service), and the company’s profits and losses will be reported on the corporate tax return form. While this is more complex than a disregarded entity, it may prove to be beneficial for small business owners due to its multiple taxation levels. When it comes to this, it might be best to talk to a professional accountant who can help guide you in the right direction.
Starting your own business can be both exciting and daunting. You have the chance to pursue your dreams while also being responsible for the well-being of your employees, and even your family. This is why it’s important to have a thorough understanding of the responsibilities that go along with forming an LLC so you can decide if it is right for your business. Never be afraid to ask experts for help, especially when it comes to the legalities behind starting your own company. It may be a little more costly at first, but knowing that you’re covered legally will provide you with peace of mind.