Course 1: Asset Protection

Asset Protection

Lecture 2: Formation and Structuring an LLC

Forming Your LLC

Although each state has its own requirements and procedures for LLC formation, the process generally involves the following steps:

Choose a unique name.

Most states require LLCs to have a unique name that is not similar to any other registered business name. In addition, LLC names must comply with the following regulations:

• Must end with "limited liability company" or an equivalent acronym.
• Must not include words or terms implying affiliation with government agencies or entities.
• Must not include restricted words or terms without proper licensing or approval from relevant authorities.

Once you've chosen a unique name for your LLC, you can use your state's business search tool to check its availability. If the name is available, you can reserve it for a certain period, ensuring that no one else can use it while you complete the official registration process for your LLC.

Designate a registered agent.

LLCs are legally required to have a registered agent, a person or a company designated to receive legal correspondence on their behalf. The registered agent serves as the official point of contact between the LLC and the state government, ensuring that all legal documents and notices are received and processed in a timely manner.

You can assign anyone to be your LLC's registered agent so long as they meet the following criteria:

• Must be 18 years old or older.
• Must have a physical street address within the formation state.
• Must be available to receive legal correspondence during regular business hours.

Can you be your LLC's registered agent? Yes, but this strategy is often considered a bad idea since the role can be demanding. You must be constantly available to receive official documents or risk missing important legal notices and deadlines.

It would be best to hire a professional registered agent to ensure that the LLC maintains service of process with the state.

File your articles of organization.

The articles of organization, also known as articles of incorporation, are the primary documents you'll need to form your LLC. These forms include your LLC's basic information, such as:

• Your LLC's name.
• Your LLC's business address.
• Your LLC's management structure.
• The name and address of your LLC's registered agent.
• The names and addresses of your LLC's members.
• The date of your LLC's formation.
• The date of your LLC's dissolution, if applicable.

Once you complete your articles of organization, you must submit them to your Secretary of State and pay the associated filing fee. The filing fee for LLCs ranges from $35 to $500, depending on your state.

Write your operating agreement.

While most states don't require LLCs to have an operating agreement, writing one is highly recommended.

Operating agreements are legally binding documents that define the rules and regulations governing an LLC. Think of them as your LLC's rule book, outlining its operation and explaining the roles and responsibilities of its members.

The contents of an operating agreement vary depending on a business's needs and goals. But it should include provisions for these key areas:

• Ownership structure.
• Voting rights.
• Profit and loss distribution.
• Member rights and responsibilities.
• Procedures for member meetings and voting.
• Procedures for transferring ownership.
• Dissolution procedures.

Since operating agreements are legally binding, working with an attorney would be better than writing them yourself.

Get your Employer Identification Number (EIN).

Lastly, you must get your LLC an Employer Identification Number (EIN) from the IRS. An EIN is a unique nine-digit code issued by the IRS to identify businesses. It's primarily used to file taxes, open business bank accounts, and hire employees.

You can get an EIN on the IRS website for free.

Choose the Right Structure for Your LLC

You can form two types of LLC structures: single-member LLCs and multi-member LLCs. The right type will depend on the number of owners/members participating in the business.

Single-member LLC

A single-member LLC (SMLLC) is a company with a single owner or member. It combines the simplicity of a sole proprietorship with the liability protection of an LLC. This organizational structure allows you to maintain full control over the LLC without the risk of personal liability.

SMLLCs are the perfect LLC structure for solo entrepreneurs hoping to launch a small business or incorporate a side hustle.

Multi-member LLC

A multi-member LLC (MMLLC) is a company with two or more members who equally share profits, losses, and responsibilities unless otherwise stated in the company's operating agreement.

Much like SMLLCs, MMLLCs offer comprehensive liability protections. This LLC structure will protect the members' personal assets from any debt or lawsuit the company or the other LLC members incur.

It's the ideal organizational structure for business partners who want to start a new venture together or for businesses hoping to attract more investors.

Tips for Choosing the Organizational Structure For Your LLC

Besides the number of owners, there are other factors you must consider when choosing the right organizational structure for your LLC, such as:

• Ownership & Control: If you want to be the sole decision-maker for your venture, then an SMLLC is perfect for you. However, if you don't mind collaborating with others, consider forming an MMLLC.
• Tax Implications: SMLLCs are typically taxed as sole proprietorships. Everything they earn and lose will be reported on the sole member's tax returns. MMLLCs, on the other hand, are taxed as partnerships. Each member will report their portion of the LLC's profits and losses on their tax returns.
• Funding: MMLLCs have a much easier time attracting investors than SMLLCs since they can issue membership interests and have as many members as they want.

Other Benefits of Forming LLCs For Asset Protection

In addition to liability protection, LLCs offer several other benefits such as:

Pass-through Taxation

LLCs are considered pass-through entities, meaning they don't pay income taxes themselves. Instead, everything they earn and lose is passed through to their owners, who must report these amounts on their tax returns and pay taxes based on their tax rates.

This tax treatment allows LLCs to avoid double taxation, where their income is taxed twice, effectively reducing their overall tax burden.

Flexibility

Unlike corporations, LLCs are not required to adopt one management structure. They can choose between a member-managed or manager-managed structure.

LLC members manage the company's daily operations in a member-managed structure. Meanwhile, LLC members in a manager-managed structure leave the day-to-day decision-making to managers.

These managers can be LLC members or professionals hired specifically for the role. This flexibility will allow you to tailor your LLC's management structure to your needs and goals.

Tax Savings

LLCs are entitled to make several deductions on their taxable income. Some of the write-offs they can claim include:

• Home office expenses.
• Operating expenses.
• Startup costs.
• Business travel and meals.
• Charitable contributions.

These deductions can further reduce your LLC's tax liabilities and provide more tax savings in the long run.

Credibility

Forming LLCs can add credibility to your business, demonstrating to your potential clients and investors that you're committed to running a legal operation.

Easy to Form

LLCs require less paperwork than corporations and are less expensive to form, with the average formation cost being less than $1,000.

Best States For Forming LLCs

The state in which you form your LLC can significantly impact the strength of its asset protection. Some states have stronger policies than others. Two states that have stood out as the top choices for forming LLCs are Nevada and Wyoming.

Nevada

Nevada is primarily known for its unique charging order protections and Domestic Asset Protection Trust (DAPTs).

While most states offer charging order protections, they are only available to multi-member LLCs. Nevada's protections, on the other hand, are extended to single-member LLCs.

The state's DAPTs are also well-known for their lack of statutory exceptions and short statute of limitations.

Statutory exceptions are individuals, such as former spouses with divorce-related claims, who can access the trust. Most states have them except Nevada, meaning these individuals are barred from accessing Nevada Asset Protection Trusts (NAPTs).

In addition to not having statutory exceptions, NAPTs have shorter statute of limitations. Creditors only have two years and six months to file claims against the trust. Once this period ends, they can no longer go after the trust.

These regulations make Nevada an attractive destination for LLC formation.

Wyoming

Wyoming is another excellent choice for LLC formation. Like Nevada, the Equality State has comprehensive charging orders and strong DAPTs. When used alongside a Wyoming LLC, these trusts can offer several benefits, such as:

• Reduced Insurance Costs: Trusts placed in a DAPT are protected from major claims and lawsuits, lowering the need for insurance policies.
• Principal & Interest Allocation: Wyoming DAPTs are governed by the state's Principal and Income Allocation Act, which allows specific amounts of money that would otherwise be classified as income to be allocated to the maintenance of the trust. This setup could lower your tax liabilities by approximately 30%.
• Captive Insurance: Payments made to a captive insurance company owned by an LLC are tax deductible. It's a tax-efficient way to self-insure your business against potential risks.

Wyoming is an excellent alternative for small business owners who want low startup costs and strong asset protection.

Why It's Important to Consult With Experts When Forming LLCs

While you can form an LLC yourself, it's highly recommended that you consult experts to help ensure it is properly formed and structured.

Forming LLCs for asset protection is more complicated than most people think. It requires careful planning and a thorough understanding of the state laws and regulations. This is where NCH can help you.

Our business formation specialists will help you understand the nuances of LLC formation. We will analyze your needs to determine the best state for your business and guide you through the formation process, ensuring your filings are accurate.

By working with NCH, you can streamline your LLC formation process and gain peace of mind knowing your assets are protected from potential risks.

Form your LLC today with NCH’s assistance! To learn more about our formation services, visit our website here or call us at 1-800-508-1729 to schedule a free consultation.

Got a Question? Start Here

01

What is the best management structure for an LLC?

Most LLCs follow the member-management structure, where all LLC members are responsible for running the company's daily operations. Each member has their role and responsibilities to fulfill. This structure is ideal for small businesses operating with limited resources.

02

What is the best tax classification for an LLC?

The best tax classification for your LLC will vary depending on your needs and goals. However, most people who form LLCs choose its default pass-through tax classification since it effectively helps them avoid double taxation.

03

What types of businesses are best suited for LLCs?

LLCs are ideal for businesses in high-risk industries, such as freelancers, consultants, and real estate investors. They are also ideal for entrepreneurs who want significant asset protection and lower tax liabilities.

04

What type of LLC is the most common?

Domestic LLCs are the most common type of LLCs in the country. These entities operate in the same state where they were formed and are easier to form than other LLC types.