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Forming an LLC
Form an LLC
Because LLCs are becoming increasingly popular among small businesses and can be operated by one person or multiple, we’ve given you a starting outline to form an LLC.
1. Determine the members of your LLC. Are you starting this company with a friend, neighbor, husband, just you? Decide who will be founding members of your company before doing anything else. The members of the LLC have a limited liability for debts of the business, unless they have personally guaranteed loans or other debts. You will spell out roles and responsibilities for each member in the Operating Agreement.
2. Apply for your EIN.
3. File your Articles of Organization with the Secretary of State. You will need to log on to your Secretary Of State's site to find the application for the Articles of Organization. In a few states it may still be called “Certificate of Organization” be sure to check. You can typically download the forms or request they be sent to you.
a. You will need to decide who the Registered Agent is. The Registered Agent will be one of the founding members that will be responsible for sending and receiving official paperwork and is involved in making business decisions. Typically this person will be you.
b. You must provide a physical address, not a PO Box where all correspondence can be sent.
c. Be sure to name your company with the term LLC included on the form. They will send the form back to you if you make this mistake. It should be the name of your company followed by a comma then LLC. For example: Chic CEO, LLC.
d. You do not need to register your company with the state if you’ve sent in your Articles of Organization. The registration of the LLC also serves to register your business name as well.
4. Create an operating agreement. An operating agreement can be compared to the bylaws of a corporation. They set forth the agreements, roles and responsibilities of all members. DO NOT underestimate the importance of this document. You may feel awkward asking your business partner to sign an operating agreement, but there are more than enough examples of siblings and friends in court over business squabbles. Here is what your Operating Agreement should include:
a. the members' percentage interests in the LLC
b. the members' rights and responsibilities
c. the members' voting powers
d. how profits and losses will be allocated
e. how the LLC will be managed
f. rules for holding meetings and taking votes
g. buyout, or buy-sell, provisions, which establish a framework for what happens when a member wants to sell his interest, dies, or becomes disabled.
Click here to download a sample Operating Agreement Template
5. Default taxation for an LLC. A limited liability company is not recognized by the IRS and is considered a disregarded entity. Therefore, an LLC must file as a sole proprietorship, partnership or corporation. An LLC operating with a single member will pay income tax as a sole proprietor and a multiple-member LLC will pay taxes as a partnership.
An LLC can also elect to file as a corporation. Again, the reason an LLC would file as a corporation is if the company is making a substantial amount of money that would warrant the tax savings. If you file as a corporation, beware that the IRS could ask you for documentation that normal corporations must keep, such as minutes, reports, resolutions, etc. You can change your election with Form 8832 at IRS.gov.
The IRS has this to say about the effect of this election on your taxes:
• If your multiple member LLC is classified as a partnership, it is deemed by the IRS that the partnership contributes all of its assets and liabilities to the association in exchange for stock in the association, and immediately thereafter, the partnership liquidates by distributing the stock of the association to the partners.
• If you are a disregarded entity and you elect to be classified as an association (corporation), you are deemed to have contributed all the assets and liabilities of the entity to the association in exchange for the stock of the association.
What does this mean? It means that whatever you and your partner invest into the company will be redistributed to you from the company as stock.
6. Register your LLC in other states. First, you will need to determine if your company is actually doing business in other states. Each state has their own definition for “doing business” but it usually includes one or more of these:
• Having a bank account in the state.
• Selling your product in the state through a manufacturer’s representative, agent or distributor.
• Having an office, manufacturing facility, distribution center or retail store in the state.
• Owning property in the state.
• Conducting business transactions or holding meetings in the state.
If you’ve answered yes to one or more of these questions, you may need to register your business as a Foreign LLC. If you are only selling your product at local retailers or online you won’t need to file for a Foreign LLC. If you decide that you are indeed doing business in another state, you will need to log on to the Secretary of State’s website for that state and find the appropriate documents. Some states will call the documents “Certificate of Authority” or an “Application for Authorization.”
7. Accurate record keeping. Keeping accurate records isn’t only good practice, it’s mandatory. Here’s what you should be keeping and for how long.
a. Names and addresses of all members and managers.
b. A copy of the Articles or Organization and all amendments
c. All tax returns (federal, state, and local) for up to 6 years
d. A copy of the LLC Operating Agreement and all amendments
e. Copies of LLC financial statements for up to 6 years
f. Copies of all LLC books and records for up to 4 years
g. A record of all Member capital contributions, agreements to contribute capital, and dissolution events
h. Records of all proceedings of Members for the past 3 years
i. A copy of all agreements and contracts of the LLC
j. Reports to Members for the last 3 years
8. Recieve additional paperwork. Once you’ve submitted your paperwork to the Secretary of State, they will be sending you a filing number and any other paperwork required from you.
9. Tax documents. Come tax time, you will be filing a 1040 and a Schedule C just like a sole proprietor and you can find the forms at IRS.gov.