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Small businesses and self-employed individuals can apply for a Limited Liability Company (LLC). If you belong to either of these categories, then bring out your note-taking stuff because this is the ultimate guide on how to do just that in 2021.
Let’s jump right in ????, shall we?
How LLC Taxation Works
LLCs are classified as a corporation, a partnership, or a disregarded entity. A disregarded entity is an LLC owned by a single person and thus, is treated as a sole proprietorship with regards to their federal income tax.
As an LLC owner or member, you can opt to be taxed as a pass-through entity or a corporation. Depending on your business, you can be taxed either one or more of the five general types of business taxes.
- Income tax
LLCs registered as partnerships are exempted from paying income taxes. Instead, each partner should file an annual information return to report their personal income or losses from the partnership ????. Other members should follow the pay-as-you-go federal income tax.
- Estimated tax
This should be done quarterly by members who have no withholding taxes if they are expecting over $1,000 in tax after filing for a return. It is better to pay more and receive a refund at the end of the year, than to pay less and be billed.
- Self-employment taxes
This is the tax you pay for social security and Maxicare if you are a self-employed LLC.
- Employment taxes
For LLCs with employees, your employment taxes will include social security and Maxicare taxes, federal income tax withholding, and federal unemployment tax (FUTA).
- Excise tax
Excise taxes are imposed on specific goods and services, such as cigarettes and gasoline. This is an umbrella type of tax that applies to manufacturers or sellers, business operators, consumers, and service providers.
Startups, freelancers, consultants and the like are more inclined to apply for an LLC because of the following benefits:
- Personal asset protection
- Heightened credibility
- Minimal requirements for compliance
- Flexible management
- Pass-through taxation
- Limited restrictions
While forming an LLC offers tempting benefits, knowing about the other side of the coin ???? will help you make a more informed decision. With that being said, here are the cons about applying for an LLC.
- Relatively high initial investment, also known as the application cost. This differs across States, with the average cost being $132.
- Tricky transfer of ownership
- Subject to other taxes levied by government regulations
Forming an LLC
Before we start, let’s get one thing straight first. Most LLC application steps are generic to all states in the US. But, if you want to know how to apply for an LCC in a specific state, like in New York City, New Jersey, or Florida, it’s best to check with the local offices
Step 1. Choose a Name and Check for Availability
When business owners register for an LLC, they usually use their business name to keep things consistent. You may do this, but you may also use your “doing business as” (DBA) name. Most of the time ⏱️, this strategy works. But have you checked for its availability with the Secretary of States records?
If there’s an existing LLC with the exact name you want, or very similar to it, then it’s better to choose another from your backup list of names. This prevents possible confusion or intellectual property infringement issues in the future.
Other actionable steps you might want to do are:
- Trademark search using the Trademark Electronic Search System (TESS)
- LLC name reservation, if you’re still in the process of completing your requirements
- Check with your state for any restricted words for LLC names
Step 2. Choose an LLC-management structure
An LLC can be owned by a single or multiple individuals. LLC owners are also members. If your business is a single-member LLC, you can forego this second step and proceed to the next. Otherwise, figure out how your LLC management should be structured because you’ll be needing this information in step four.
There are two types of LLC management structures: member-managed and manager-managed. In a member-managed LLC, all LLC owners have a say in the decision-making process and ultimately in running the business.
In a manager-managed LLC, the owners appoint a manager, or managers, to handle the administrative tasks. These managers help by making decisions on matters that don’t necessarily require the approval of every member. Without them, the process is too tedious and time-consuming.
The manager is responsible for making decisions on:
- Entering and signing contracts and agreements
- Buying and selling business assets
- Managing business bank accounts
- Hiring employees
- Securing business loans
Step 3. Choose an Agent
As an LLC, you are required to have a registered agent as the focal person that the state can contact for any business-related concerns. He or she will handle and process all pertinent legal documents on your behalf, so it’s important to scout for someone who’s credible.
You’ll find there are plenty of registered agent services across the US, but you can narrow down your search by adding in the name of the state you want to apply to. For reference, your potential registered agent should be:
- At least 18 years of age
- A resident of the state you’re applying in
- Reachable within business hours, in case there is a service of process request
Step 4. File Articles of Organization
✊ The form you accomplish when you apply for an LLC is called the Articles of Organization. They may also be referred to as the Certificate of Organization or the Certificate of Formation.
Here are the steps to filing this document:
4.1. Look for the current form used in the state that you wish to apply in. Form layouts might vary, depending on the state.
4.2. If it’s available, you can download the file online.. If not, you’ll have to go to the office of your respective Secretary of State and grab a physical copy.
4.3. Fill in all the required information.
- Company’s business name and address
- Names and addresses of the LLC members
- Names and addresses of the LLC managers, organizers, directors, etc.,
- Name of the registered agent
- Effective starting date of the business
- Nature of the business and its purpose statement. For this part, broad statements with keywords “lawful activity” are recommended for greater flexibility.
4.4. Pay the filing cost to form an LLC in your state. It can be as low as $40 in Kentucky or as high as $500 in Massachusetts. There are also other fees to watch out for such as:
- Publishing requirement
- Annual privilege license
- Annual franchise tax and excise tax
- Annual entity tax
- Annual partnership tax
- Annual enterprise tax
- Annual filing fee
- Annual commercial activity tax
- Percentage value of assets annually
Keep in mind that most legal documents should be notarized before being submitted to the Secretary of State office. Factor this into the filing cost.
Step 5. Create an Operating Agreement for Your LLC
While an Article of Organization is a general document that is used by all LLCs, an Operating Agreement is specific to an LLC. It’s like the terms and conditions ???? that the LLC owners, investors, and other related entities should agree to before running the business.
California, Delaware, Missouri, and New York specifically require LLCs registered in their states to submit an Operating Agreement. But even if you aren’t applying to any of these states, it would do more good than harm if you draft one for your LLC. Having everything in black and white gives you more confidence and reassurance that you are doing things right with your business.
Here are some points that should be included in your LLC’s Operating Agreement:
- Percentage ownership per member
- Rights and responsibilities of each member
- Duties and powers of each member
- Profit and loss allocation
- Meeting and voting rules
- LLC-management related details
- Buying and selling provisions
Since this is a legal and binding document, it would be wise to seek a lawyer’s guidance, especially when it comes to the terms used in the document. Doing so will count as preparation for potential service of process requests that the LLC might encounter.
Step 6. Comply With Requirements
We’ve covered the heavy requirements needed for your LLC application such as the business name, registered agent, Article of Organization, and Operating Agreement. But if you think that’s all you need to submit to get your LLC up and running, you’re mistaken.
As mentioned in step 1, you can use your existing business details in applying for an LLC. This also applies to the other requirements that you need to submit for compliance:
- Business license and permits (local licenses and registration, too)
- Statement of information form, which you will need to update yearly
- Tax forms such as the Internal Revenue Service Federal Tax Forms 1065 and 8832
Again, always check in with your state about these requirements.
Step 7. Open a Bank Account for Your Business
It’s common practice to open a separate bank ???? account for any business. You should do the same for your LLC. While it’s not a hard requirement, this business bank account will count as evidence that you and your business are separate entities and that your financial decisions are different from your LLC’s.
You’ll need your Article of Organization and Operating Agreement documents, as well as an Employer Identification Number (EIN) to open a bank account for your business. Some states might also require your business license and permits as supporting files.
Step 8. File Annual Reports
Annual reports, in this context, are not solely about financial-related information. It’s a more comprehensive document about the activities of your LLC in a year’s duration. These include changes in the roster of members, or important details that the general public should know about your LLC.
Generally, the filing of annual reports and information returns is mandatory for LLCs in all states. More specific regulations may apply in other states. For example, In one state, the deadline of filing an annual report might be each year after your LLC’s start date, but it might be the end of the current calendar year in another.
Whichever state you are registered in, these are the usual consequences you might encounter if you miss any annual report deadline.
- Change in business status to “inactive” or “ceased good standing”
- Late fees and reinstatement fees
- Impediment of your business operations
- Loss of corporate protection
Again, we’d like to reiterate that this 8-step guide on how to apply for LLC is generic. Some states might require more requirements and additional steps to process your registration, but we’ve covered the essential parts for you to take note of.
You Might Ask
How do I form an LLC on my own?
To form an LLC on your own, you should first choose a business name ????. Then, decide between a member-managed or a manager-managed LLC structure. Scout out a credible registered agent before filing your Articles of Organization. You should also have an Operating Agreement document, and a separate bank account set up for your business.
How long does it take to get an LLC in Mississippi?
It usually takes 3 to 5 business days to get an LLC in Mississippi, if you submit your requirements by mail. Online filing and submission is much faster.
Is an LLC an individual?
An LLC or Limited Liability Company is a state-defined business entity. But an individual can file for a single-member LLC.
Do I need an EIN for an LLC with no employees?
No, you do not need an EIN for an LLC with no employees. Since you won’t be paying any employment-related taxes, as well as excise tax, you can use your personal Tax Identification Number (TIN) for federal tax purposes.
Can I open LLC without SSN?
Yes, you can open an LLC without a Social Security Number (SSN). If anything, you should prepare your TIN, or EIN.
Do I need insurance for LLC?
Yes, you need a separate insurance for your LLC. While your personal assets are protected when you register for an LLC, this doesn’t extend to your business assets. You will still need insurance to cover both internal and external risks to your LLC.
Applying for an LLC is like a standard operating procedure for established freelancers and startup businesses. While you can register for an LLC in any state in the US, you should know that each state has its own rules ???? about the processing and needed requirements.
We hope that this article was able to shed a light on the actionable steps to get you started on your LLC. It’s a lot to take in, so take it one step at a time. The hardest part is getting started.