How to Form a LLC
A corporate structure now combines some of the best features of a corporation and sole proprietorship and partnership. An LLC benefits from the pass-through taxation of partnerships and sole proprietorship, and the liability protection of a corporation.
If you are interested in forming your business as an LLC, here’s a basic guide.
An LLC is a corporate structure that combines some of the best features of a corporation and sole proprietorship and partnership. Like in proprietorships and partnerships, an LLC owner benefits from the pass-through taxation. All profits, loss and expenses of the business go to the personal income tax of the owner, thus avoiding the double taxation that happens in corporations. Like in corporations, the business owner is protected from the liabilities of the business. It means that should be the business face a lawsuit or go bankrupt, its claimants and creditors can only go after the business’ assets and not that of the owner.
For people who want to incorporate a business as an LLC, here are some steps to take:
- Evaluate whether an LLC is the best structure for your business. While it has advantages, it also has its downsides. For example, unlike in a corporation, an LLC has a fixed life (although members may opt to extend this). If there are plans to go public, the business is better off as a corporation. For a detailed comparison of business structures, visit The Small Business Administration Web site.
- Visit the Web site of the State secretary to find out the requirements in forming an LLC, which usually include the name of the company, names and addresses of incorporators, the type and number of stocks, names of the directors, officers and legal representative, initial capital investment, and corporate bylaws. Ascertain that the type of business is allowed to form an LLC. Some states do not allow certain establishments, like banks to be formed as an LLC, and certain liability-prone professions like doctors from forming LLCs.
- Prepare an operating agreement if there are co-owners, otherwise the business will be governed by default by the general laws for LLCs in the state.
- File the articles of organization or articles of formation. You will be asked to pay a filing fee of around $150, excluding other government filing fees. Filing usually means accomplishing a fill-in-the-blank form, which can either be obtained by mail or downloaded.
- Take care of all the other necessary details in opening a business: getting licenses and permits, entering into leases for a store or office space, and contracts with vendors for retailers, among others. To see required state licenses for incorporating a business, visit USA.gov.
While you don’t really need a lawyer to apply for the formation of an LLC, it is better to consult one to ensure you are doing everything right.
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