What is an LLC and how to setup one in a State in the U.S
A limited liability company (LLC) is a business structure that can be formed under state rules in the U.S.
LLC is a hybrid business structure that combines features of both a corporation and a partnership. Like a corporation, LLCs provide their owners with limited liability in the event the business fails. At the same time, like a partnership, LLCs “pass-through” their profits so that they are taxed as part of the owners’ personal income.
Even though the rules for LLC formation and its operations may vary from state to state, the basic concept of an LLC is the same throughout USA.
Owners of an LLC is called members. Anyone can be a member including individuals, corporations, foreigners, foreign entities, and even other LLCs.
Why should you consider forming an LLC to run your business?
The 2 main features of an LLC which are attractive to people considering a business registration are:
- Limited liability to the owners – owners are not held personally liable for the debts of the company. If the company goes bankrupt or is sued, the personal assets of its owner or investors are not in danger.
- It allows all profits of the business to be passed directly to the owners of the LLC to be taxed as personal income. This can avoid double taxation, meaning, LLC on its own don’t have to pay taxes only the owners pay taxes as personal income taxes.
However, an LLC may not be suitable if the following is important to you.
- LLCs don’t have shares and shareholder. It cannot issue stocks or shares hence not a good choice if you are looking for outside investors or to trade stocks and shares of your business.
- If you plan on keeping the business in the family for generations, it is difficult to transfer ownership, particularly if the sole member dies. In this situation, a forming a corporation is a better choice.
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Steps to form an LLC
- Naming your LLC: Select a suitable name for your LLC. The name must end with the words ‘Limited liability Company’ or its abbreviations ‘LLC’ or ‘L.L.C’, Also, your name cannot be too close to other existing business names to cause a confusion.
- Registered Agent: Choose a registered agent. A registered agent can be a person including yourself or an employee of your LLC or an entity that offers a registered agent service. A registered agent must have an address in the state of LLC formation and always available on site during business hours.
- Registration: Register your LLC with the State by filing Articles of Organization (also called certificate of formation in some states). The State will then issue a Certificate of formation of your LLC.
- Apply for an Employer Identification Number (EIN) to Internal Revenue Service (IRS). EIN is a 9-digit number issued by IRS to identify your LLC for taxes. EIN is also required to open a bank account. You can obtain an EIN for your LLC by applying online through the IRS website. This is a free service offered by IRS for all new business formations.