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What is an LLC? Your Comprehensive Guide to LLC Formation

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As you start a business, you’ll need to choose the best structure for it. Your choice dictates how much you pay in taxes, whether you can increase funds, which documents to file, and your personal liability.

July 18, 2023
Author: NCH

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Common business structures include sole proprietorships, partnerships, and limited liability companies (LLCs). But what do LLCs mean, how do they work, and how do you form one? Let’s look at the basics of an LLC and creating your own.

Defining an LLC & How It Works

Forming an LLC offers personal liability protection against business debts and specific actions. LLCs combine the advantages of corporations, partnerships, and sole proprietorships. As an LLC owner, you are referred to as a member.

LLC ownership is open to individuals, corporations, foreign residents and businesses, and other LLCs. However, certain entities, such as banks or insurance companies, may encounter state-imposed limitations on establishing an LLC. State laws regulate the formation of LLCs, with varying rules to consider. 

The Benefits of Forming an LLC

Starting an LLC gives you several advantages. Here’s why you should consider adopting this business structure.

  • You’re protected from personal liability. An LLC makes you less liable for its debts or legal issues while protecting your personal assets once it faces bankruptcy or lawsuits. You get this protection while running your business legally and separating its finances from yours.
  • An LLC offers a flexible management structure. Whether you solely own an LLC or run it with others, you’re free to make crucial business decisions. But if you want to leave business operations to the experts, you can hire professional managers from inside or outside the company.
  • Profits & losses go to your personal income. Another benefit of forming an LLC is that its profits and losses can go to your personal income tax-free. You pay tax on these amounts on your income tax return for easier filing of taxes.
  • An LLC helps you build credibility. Customers will know your LLC operates as an actual business, and you get an official business name.

How to Start an LLC: Your First Steps

If you’ve already decided to form an LLC, here are the steps you must take.

Choose a Business Name

When selecting a name for your LLC, it’s crucial to consider both marketing aspects and compliance with state law requirements.

State regulations often prohibit using the same name as another company and certain terms indicating involvement in industries like insurance or banking. Additionally, states may mandate the inclusion of “LLC,” “Limited Liability Company,” or similar variations in your business name.

For instance, in Nevada, LLC names must contain “Limited Liability Company,” “Limited Company,” “Limited,” or certain accepted abbreviations. This includes names ending in “Ltd.,” “LLC,” or “LC.”

To determine specific LLC naming requirements and check name availability, visit your state’s business filings department website or the official website of your Secretary of State.

Remember, finding a name that satisfies marketing goals and adheres to legal obligations ensures a solid foundation for your LLC.

Hire a Registered Agent

After choosing your business name, you must designate a registered agent to accept state or legal documents on your LLC’s behalf. This individual hands all important documents received to your company.

Keep in mind that your registered agent must be at least 18 years old or above. You can appoint yourself or another employee as an agent, but whoever you choose must be within your state during business hours.

Using registered agent services is another option to consider. However, you must pay a fee to do so. Pricing varies by company.

File Your Articles of Organization

To establish your LLC, it is essential to draft and file the articles of organization with your state. This document specifies the rights, powers, duties, liabilities, and responsibilities of your LLC’s members.

Ensure that your articles of organization include the names and addresses of each member, the registered agent’s information, the purpose of your LLC, and other vital details. Keep in mind that filing the document typically involves paying a state filing fee.

Create an Operating Agreement

The operating agreement of your LLC encompasses the financial, legal, and management rights of all members. It outlines crucial aspects such as profit allocation, member withdrawal procedures, and capital contributions, providing a framework for the operation of your LLC.

While filing operating agreements is not mandatory, it is highly recommended to have one in place. Whether you operate the LLC individually or with partners, creating an operating agreement is beneficial. For a multi-member LLC, seeking legal expertise may be necessary to ensure the document is comprehensive and legally sound.

Get the Necessary Permits & Licenses

Ensuring compliance with permits and licenses is essential for your LLC. Depending on your business activities, you may be required to complete application forms and pay associated fees. It is advisable to consult your Secretary of State’s office or website for a comprehensive list of required permits and fee schedules.

Furthermore, it is crucial to carefully review the specific licenses and fees applicable to your LLC and adhere to important deadlines. Failure to comply with these legal obligations can result in potential legal consequences. Stay proactive in fulfilling your licensing requirements to operate your LLC smoothly and avoid any compliance issues.

Obtain an Employer Identification Number (EIN)

Finally, you’ll need an EIN for your LLC. It’ll help you divide your business and personal assets and open a business bank account. Specific laws even require some businesses to get an EIN.

If you’re starting your LLC, consider obtaining your EIN immediately. You can apply for one in the Internal Revenue Service (IRS).

Your Next Steps After Forming an LLC

Here’s what you need to do to keep your business running efficiently:

  • Follow state laws. Check the regulations applicable to your LLC, review them, and ensure compliance. You can ask business experts to help you identify and study laws relevant to LLCs.
  • Maintain proper records & documentation. Create a minute book and keep your LLC’s important documents, including its operating agreement, bylaws, and resolutions there.
  • Meet annual reporting & tax filing requirements. For instance, states like New York and Alaska require annual reports every two years. Ask your Secretary of State’s office or visit its website for specific guidelines.

Funding Your LLC: 3 Common Strategies

Establishing an LLC requires careful consideration of funding to ensure its success and growth. Inadequate capital is a common reason for business failures at early stages. 

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To finance your new LLC effectively, consider the following strategies:

Use Your Personal Assets

To kickstart your LLC, various funding options are available to you. Selling specific assets or using them as collateral for business loans can provide the necessary funds. Additionally, you can consider tapping into your savings, selling valuable assets, applying for home equity loans, or borrowing from your retirement account. 

It is essential to keep track of loan repayment deadlines and ensure timely settlement of your debts. By exploring these financing avenues, you can secure the capital needed for your LLC’s successful launch and growth.

Apply for Business Loans

Many new entrepreneurs fund their businesses with business loans from banks and credit unions. If you take this step, you must submit a business plan with other required documents for loan applications.

Owning an LLC makes you less responsible for its debts, meaning you protect your assets if you can’t settle loans. This protection makes business loans ideal for LLC owners. Specifically, lenders will only collect business loan payments if you provide collateral or secure the loan.

Find Investors

Securing investment from individuals or businesses is another viable funding option for your LLC. In exchange, investors become owners or stakeholders in your company.

Investors come in various types, such as venture capital (VC) firms and angel investors. VC firms specialize in funding startups and businesses in their growth phase, while angel investors provide financial support to startups and small businesses. These investors may choose to invest in your LLC, often in exchange for a certain level of control and ownership.

By attracting investment, you can access additional resources and expertise to fuel the growth of your LLC.

How to Manage & Grow Your LLC

Managing your LLC is as crucial as creating it. Let’s look at four effective ways to run a successful LLC.

Create a Strong Business Plan

A business plan serves as your guide to effective decision-making. Simply put, it helps you understand your target market and attract your ideal customers. Your business plan can also lead you to new ideas and see whether they benefit your LLC.

Business plans get outdated as market trends change. Hence, you must always revisit and revise your LLC’s business plan to strengthen it and keep up with sudden changes.

Hire & Manage Employees

Like other businesses, your LLC needs human resources. Important HR decisions range from determining employee compensation to choosing how to handle labor issues.

In today’s business landscape, a diverse team will help you manage your LLC successfully. Employees with the same experience and skills as you may seem like the better option, but it can give you unnecessary perspectives and expertise. Considering people of all backgrounds and with the skills your LLC’s operations need help build a diverse workforce.

Implement Effective Marketing Strategies

Your LLC’s success also depends on whether you execute a marketing strategy. Marketing starts with finding your target customers and continues as you offer new products and services to these individuals.

Effective marketing strategies require an in-depth look at the market and demand for your product or service. Then, you identify your prospective customers and choose how to engage with them.

Lastly, assess your overall marketing performance and refine your strategy if needed. You can monitor performance with web analytics tools, including Google Analytics, or similar solutions.

Measure Your LLC’s Success & Make Adjustments

As you grow your LLC, it helps to measure and track its success. Otherwise, your business will lag behind the competition.

Establish defined business goals, end unsuccessful projects, and adjust your strategy until you succeed. And most importantly, keep evaluating and improving your LLC’s performance.

3 Common Mistakes to Avoid While Running an LLC

While running a business, it is crucial to aim for smooth operations. To help you navigate the journey, here are some common mistakes to avoid when managing your LLC.

  • Combining personal and business finances: With these funds in one place, your liability increases, and you risk losing your assets. Get an EIN and open a business bank account to separate personal and business assets.
  • Neglecting compliance & reporting obligations: This mistake can create legal complications for your LLC. Again, make sure to follow state laws and reporting requirements.
  • Failing to protect your LLC’s intellectual property: Anyone can use your brand name, company logo, or other intellectual property without your permission. You can protect these creations through patents, copyrights, trademarks, or trade secrets.

Build & Ensure a Successful LLC with Expert Help

LLCs protect you from legal liability, prevent the loss of your assets, allow pass-through taxation, and make you credible. LLC formation is challenging, but understanding how it works and what to do during and after the process will help you run a successful business.If you’re creating an LLC, NCH’s business and legal experts can guide you throughout the process. Contact us today for more details about our LLC formation services, or get actionable tips and insights from our blog.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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