Things to Consider Before You Form LLC
When considering the business entity best suited to your needs as an entrepreneur, you might choose to form a Limited Liability Company (LLC). A small business owner who chooses to form LLC, rather than incorporate as a corporation or s-corporation, operates an entity with fewer legal formalities and friendlier taxation. LLC formation also results in easier management and limited compliance requirements.
Before you form LLC, you will need to know what’s involved to operate an LLC. The owners of an LLC are known as “Members” rather than “Shareholders” because an LLC does not require the issue of company stock. At the time of LLC formation, the Members adopt the Operating Agreement, which is the central document of an LLC and stands as the Members’ written agreement to follow the rules and procedures for operating the LLC. The Operating Agreement should also specify what percentage of the LLC each member owns. Members can make changes to the Operating Agreement as the business changes and grows.
If you form LLC, you will need to determine if the LLC will be Member-Managed or Manager-Managed. The Member-Managed LLC is the best choice or entrepreneurs who prefer ease of management and is therefore the most common form of LLC management. A Member-Managed LLC is managed with each Member participating in the daily activities of the business. If an LLC is Manager-Managed, the company designates a manager or managers (who may or may not be a Member or Members) to run the business day-to-day with the Members typically only involved as investors.
It may be of personal and financial benefit for an individual to form LLC. The 1-Person LLC is now recognized in all 50 states and offers personal liability protection, business credit building and easier taxation. The 1-Person LLC is taxed like a sole proprietorship with the LLC profits and losses added to the owner’s personal tax returns, and is a great alternative to entrepreneurs just starting out who may want to add additional Members to their LLC in the future.
Regardless of the LLC’s size or purpose, you need to choose a state in which to form LLC. The majority of entrepreneurs form LLC in their home state for convenience, in addition to avoiding the extra fees that add up with LLC formation in another state. If you were planning to form LLC in Delaware but operate your physical business in California, for example, the state of California would require you to re-register the LLC as a “foreign corporation” (a company that was not originally formed in California) and you would typically be subject to all the same annual legal fees, licenses and taxes as an in-state company. If you form LLC in the states of Delaware, Nevada or Wyoming, know that virtually every state has laws that require an LLC to re-register these states’ LLC’s in their home state.
If it seems like the best option for you to form LLC, you can efficiently form LLC online using an online incorporation service. Online LLC formation allows you to file the LLC’s Articles of Organization or Certificate of Organization in accordance with state law and is a good way to follow all legal procedures while saving time to focus on your business.
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