No matter what kind of a business you run, having the sense to protect your assets and investment should be the first thing on your agenda. This means that you need to figure out a way to separate your business from your assets. If your company goes down or faces a loss, you don’t want it to take every bit of your savings with you.
Thankfully, LLCs exist to shield your personal assets from your business finances. An LLC, or a limited liability company, provides personal liability, drawing a line between your finances and business. Not only that, but you get pass-through tax advantages as well.
You don’t need to own a specific type of business to start an LLC. Any business, big or small, can form an LLC. However, some variables might differ from company to business and in different states. So, if you are a first-timer or generally confused about the where and the hows, we are here to help. This article will walk you through four things you should know before starting an LLC. Keep reading to learn more.
4 Things I Wish I’d Known Before Starting an LLC
Where to Set It Up
Where you choose to start an LLC doesn’t just depend on where you operate your business. Several factors determine the ideal location for forming an LLC. These factors include:
- LLC fees
- Workforce availability
- Regulatory burden
The rules and regulations of forming an LLC in all fifty states differ. Some have a more business-friendly environment, while others have strict rules. They also have varying fees for creating and maintaining an LLC. These small details can have a much more significant impact once you start operating.
Before starting an LLC in a state, you need to understand the state’s rules regarding LLCs and the nature of the business you own. Some states require hefty paperwork for specific companies, typically those involving edibles, medicines, and other health-related products and services. On the other hand, some states are so easygoing that they don’t even require a business certificate.
You also need to keep in mind the fines and the penalties of the state. Some states impose an out-of-state business fine for starting an LLC if you don’t follow specific rules. Wherever you plan to set up your LLC, make sure you understand the rules.
Setting up an LLC in your home state should always be your first choice. This way, you won’t have to pay any state income tax. Moreover, if you register in a foreign state, you will also have to file in your home state. As a result, you’ll have to pay filing fees twice as you register in two states. Depending on your business, filing in a foreign state might be beneficial. However, it will always cost less to register in your home state.
Obtain a Registered Agent (RA)
Another essential factor to consider before starting your LLC is getting a registered agent. A registered agent is a business entity that accepts all legal notices and documents on behalf of your business. Getting a registered agent is a requirement that most states impose, and depending on the state’s laws, you can either sign-up with a company or be one yourself. David Reed, the Co-Founder of LLCStars, says:
“When starting an LLC, people oftentimes have difficulty finding a trustworthy and experienced registered agent. To find the best registered agent services out there, compare prices, services, as well as testimonials. Reviews are crucial to finding the best registered agent for you.”
The purpose of a registered agent is relatively straightforward. A registered agent will accept all legal documents and service of process. This means they will notify you if there is a pending lawsuit against the business. Moreover, RA’s will accept service of process on behalf of your business. The legal documents that the registered agent handles include tax forms, summons, and official government correspondence, including annual reports.
Know Your Tax Options
Apart from protecting assets, having an LLC will also provide you with flexibility regarding business taxes. There are four federal tax classifications for tax options with LLC:
A single-member LLC is when you are the sole proprietor or owner of an LLC. As the sole proprietor, you must report business expenditures on your tax form.
Multiple member LLCs can be taxed as a C corporation or S corporation. In this case, the business gains or losses are reported on a separate 1065 tax return form. Each member has to pay their self-employment tax as their side of the share. In simple words, the partnership profit of each member is reported on the tax form.
If the LLC is elected as S corp, the business will file a 1120S tax return. The individual company owners are filed to their shares, which are not subjected to self-employment tax.
Lastly, if the LLC forms a C corp, it will use form 8832 to file taxes. C corp includes double-taxation, which means that the LLC is first filed on its profit at the corporate tax rate. Next, the LLC owners are taxed at the dividend rate after the LLC profits are distributed among them.
Create an Operating Agreement
When setting up an LLC, you should have an operating agreement. This agreement defines the entire structure of your LLC and how it operates. An operating agreement also works to protect the business’s liability status and prevent the state’s interference in the management of your business. Drafting an operating agreement is a good idea, and you can also hire professionals to do the job for you.
An LLC is a great way to protect your assets from your business’s downfalls. However, there are some important factors that you should sort out before starting an LLC. When forming an LLC, decide where you’re going to register, whether your home state or a foreign state. Additionally, hire a registered agent, know your tax options, and develop an operating agreement. We hope that this article helped you better understand what you should be doing before setting up an LLC for your business.
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