How To: Form an LLC

by: Jen Udan | ChooseWhat.com

When you register your business, you are creating a legal entity and, as such, will be afforded significant benefits under the law.

Creating a business entity offers many benefits to business owners and entrepreneurs, such as specific tax benefits and some protection against liability. Also, you’ll need to have registered your business before you can do any of the following important steps to forming your business:

• Open a Business Bank Account
• Get a Business Loan
• Get a Business Credit Card

What is a Limited Liability Company?

A Limited Liability Company (LLC) is a very popular type of business structure that blends the benefits of limited liability of a corporation with the favorable tax treatment of a partnership. The company's income "passes through" the corporation and is treated as the personal income of the owners. This allows you to avoid having the earnings taxed at both the corporate and individual level. Once you form an LLC for your business, that LLC will be legally recognized as an independent entity that has its own unique Employer Identification Number (EIN), which is the equivalent of a Social Security number for a person.  Once you have an EIN for your business, the company can have its own bank account, purchase insurance, take out a loan, and take advantage of all kinds of other corporate services.

If I'm operating by myself, can I form a sole proprietorship instead of an LLC?

If you're operating your business by yourself, we still recommend that you incorporate as an LLC instead of as a sole proprietorship. For more information, read our STARTicle: Sole Proprietorships vs. Single-Member LLCs: Which is better?

 Before you register your LLC, you should:

1. Name Your Business

2. Set Up a Phone Number

3. Set Up a Business Mailing Address

Register your LLC

• Use Legal Zoom.  This is the easiest way to go. LegalZoom is a service that is available in all 50 U.S. states. It provides you with a simple questionnaire to fill out about your business, and then it creates, reviews, and files your business entity papers. The price to file papers for an LLC using LegalZoom is currently $99-$359, depending on the package you select.

• Hire a Corporate Attorney.  If you can afford it, this is the best way to go. However, be prepared to spend several thousand dollars. The exact cost will depend on your attorney’s hourly rate and how complicated your situation is.

• Do it yourself.  (Not Recommended)  This is the cheapest way to go but it carries the most risk. You can go directly to your Secretary of State and, in most states, file your application online. However, if you don’t know what you’re doing you could very easily mess up your paperwork, which would cause your application to be denied. At the very least, this would slow you down and at worst, could create more complicated issues for you to deal with.

Other Types of Business Entities: 

Many business owners find it favorable to register their business as an LLC. However, you should familiarize yourself with other types of business entities and the advantages and disadvantages of each particular structure. For more information on these options, visit our STARTicle: Incorporating Your Business - What Are The Options?

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• An LLC can file taxes as an S Corp to minimize self-employment tax.  As a business owner, you will probably be subject to self-employment tax. However, LLCs can elect to file taxes as an S Corporation, which can, with proper planning, reduce self-employment taxes. Consult with your accountant for more advice on this subject.

• Disclaimer on Legal Advice:  We are not attorneys and are unqualified to give legal advice. We strongly recommend consulting with an attorney if you can afford it. In addition, the information on this guide is limited to standard practices and the best of our knowledge. A good attorney will be able to help you come up with a creative solution if standard practices don’t fit your particular situation. However, this guide should give you a basic understanding about business entities and the tools to get started if you choose to do so.
• Disclaimer on Tax Advice:  We are not accountants. Do not rely solely on this information to file your taxes. Each state has its own tax code, which you will need to consider in addition to the tax information in this guide. We recommend consulting with an accountant about your particular situation in the location where you choose to do business.