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Maybe you’ve found yourself with a growing business and you never dreamed you’d be reading an article about forming an LLC, but you’re realizing you might need to look into it. Or did you just venture out into your own startup, and you want to make sure you start right?
Either way, you’re in the right place. Forming an LLC is a great next-step on the grand journey of business ownership. Recently, I sought to help my friend discover the benefits of forming an LLC, and we ended up having an incredibly positive experience when she formed her first limited liability corporation.
Backstory time. My friend has a tea company she’s “owned” for years, just giving tea to friends and family when she had the margin to make it in her free time. Then, a few years ago it started to really pick up. So she started pricing out her tea and selling it for a profit.
Soon enough, it was a full-forced operation that she started to call her own business! Recently, we sat down to develop some business goals for her company’s future.
One of these goals included adding legitimacy to her business, as well as setting up a system that would allow her taxes to be a breeze when that time came.
Here’s Why You Need An LLC & How To Actually Get One
We checked out several options before deciding on what would be best for her, including forming a Sole Proprietorship, an S Corporation, a C Corporation, and finally an LLC.
With a Sole Proprietorship, you essentially just file your company name with the state, and file your taxes as a self-employed person. That’s what I currently file with as a freelancer, and it works for my situation since I’m typically not vulnerable to much risk.
With an S Corporation, the owner is taxed for the business income, rather than taxing the income itself. A C Corporation is the opposite – you’ll need to file separate taxes for your business and personal income.
Both C and S Corporations provide a more extensive coverage to business owners who are interested in hiring employees and getting business insurance.
An LLC provides liability coverage, as well as a concise way to file personal and business taxes alike, just like the S Corporation. It’s typically where a new business owner should start, and there are a few reasons why.
Because of these reasons, my friend and I found that the best way she could meet both of her needs for legitimacy and tax organization was by forming an LLC. It was her “next step” in her journey of business ownership. Here are some of the reasons why you need to form an LLC if you’re a business owner:
Like I mentioned, my friend wanted her business to become its own entity, and to be respected as a legitimate organization. To do this, she needed to form her LLC, complete with her business name and all. And honestly, adding “LLC” to the end of the business name provided some proof that her side gig was now the real deal.
If you have a business that you haven’t yet formed as an LLC, chances are you’re claiming this business income as if you’re self employed, or as a Sole Proprietor. This can get super complicated if you have a nine to five job as well as your business.
With forming an LLC, my friend was able to just insert her business income on her personal tax form, in a specified area. This process is called pass through taxation because your LLC taxes are essentially “passed through” your personal income tax report. So with an LLC, your business income is tracked separate from your other income, but you can report this income all in one place.
And now for the most obvious reason to file an LLC: to limit your liability.
What does this mean? It’s pretty simple. In the case that any legal expenses arise related to your business, your personal assets can’t be taken. Let’s say my friend accidentally sold a bad batch of her tea, and a customer sues her for $1 Million.
If she loses in the suit, she won’t lose her home or go personally bankrupt. The formation of an LLC limits your exposure to personal risk in your business venture.
Okay, now that you know these benefits, how do you form your own LLC?
How To Form An LLC
My friend and I found that with a few simple steps, you’ll have your own LLC in no time:
1. File with your state
First, you’ll need to basically declare your business name to the State you do business in. My friend made sure that her business name wasn’t already taken, and filled out the required form for her home state to register as an LLC.
Check out your specific state’s requirement for filing a form to create an LLC. You can file in multiple states if needed!
Expert tips: be prepared to pay a fee. There are usually minimal fees associated.
But realize that this small fee is nothing compared to the huge expense of a legal battle that might cost you personally if you’re personally liable for your business instead of forming an LLC!
Also recognize that you don’t need to go through a third party to form your LLC! There are several online vehicles that will charge you an arm and a leg to create an LLC, but don’t fall for this.
2. Decide on a Registered Agent
A registered who? A Registered Agent is just the individual who makes decisions on behalf of the LLC. If your business is smaller, you as the owner will probably assume this role. As your business gets bigger, an option would be to hire out for this role as bigger decisions come your way.
For my friend’s tea business, she just assumed the role of RA.
Expert tip: have a practicing small business lawyer or attorney look over your forms as you’re filing to create your LLC. They’ll be sure you cover your bases and protect yourself from liability in all the right ways.
3. Make an Operating Agreement
This step isn’t usually required, but it’s crucial for the health of your business. It essentially just walks through the “who’s” and “what’s” of the operations. Who are the employees? What are they responsible for?
For my friend’s business, it was just her and a few family members, but she made sure to write out the operations that each were responsible for piece by piece. The operating agreement also outlines the way profits will be used and losses will be handled.
Expert tip: file the operating agreement somewhere accessible so if the need ever arises, someone could continue on the business operations with clear instructions.
4. Get an EIN
An Employee Identification Number, or EIN, allows you as the business owner to open bank accounts and file your taxes with this unique indicator. Each EIN is different, and you’ll need one to set apart your business as an LLC. You can apply directly with the IRS.
Now that she’s a couple months into having her own LLC, my friend is enjoying the benefits that come with keeping her business separate but close by limiting her liability and differentiating her incomes.
She tracks her business expenses and incomes knowing that filing for taxes won’t mystify her, and her personal life is protected from any catastrophic business ordeals that might occur.
Forming an LLC is typically the next-step for many new business owners, and for good reason, but make sure you do your research on Sole Proprietorship, S and C corporation so that you can ensure you're making the best decision for your business.
Overall, an LLC provides the protection that you need while allowing flexibility as well as legitimacy with your business, no matter what stage you’re currently at.
So, go out there and form that LLC!