Limited Liability Company (LLC) is a type of business company accepted by all states in the USA, combining the best benefits of other sole Proprietorship, partnership, and corporation types.
LLCs are the most preferred type of company in the USA. It is the type of company most preferred by foreign investors from outside the USA who want to invest and establish a company in the USA. Any number of members may elect to create an LLC, and members may be added or removed as the business grows. Entrepreneurs mostly choose LLC cause it’s cheaper and more flexible than corporations. It can be converted to a C Corporation when the needs of the company change in the future.
What Is An LLC?
LLC means Limited Liability Company. LLC stands for “Limited Liability Company.” An LLC is a limited liability company, a legal entity, and a business structure created by state law. An LLC is a relatively simple business structure, with profits from the business passing through to the members’ income based on their ownership share.
Definition of LLC
In an LLC company structure, the owners and partners are not personally liable for the debts and obligations of the company. In other words, in case of loss or bankruptcy of the company, the only loss of the partners will be their contribution to the company capital.
A Limited Liability Company called an LLC is a legal business structure that protects the owners’ personal assets (real estate, personal bank accounts, car, etc.) if others sue the company.
There are LLC companies in every industry, but LLCs are the most common legal entity used to own rental and commercial property.
What Is SMLLC?
LLC-type companies are partnerships, meaning they require more than one partner. A Sole Proprietorship is a sole proprietorship where a single owner is responsible for all debts and receivables of the company. SMLLC is the short form of “Single Member Limited Liability Companies”. SMLLC offers an intermediate solution at this point. It makes it possible to form an LLC by a single person.
Thus, as in a sole proprietorship, there will be only one company owner, but the owner’s personal assets will be protected against the company’s debts. The main distinction between the two is that a sole proprietorship and the owners are the same, while a single-member LLC provides a divide between the two in both legal and tax matters.
Types of Businesses in the USA
There are four main types of business organizations in the US. The chosen company type influences everything from daily operations to taxes and how much of your personal assets are at risk.
- Sole Proprietorship
- Limited Liability Company (LLC)
- Business Corporation ( S Corporation & S Corporation
How to Form an LLC Company?
- LLC companies are business entities that operate under the laws of the US states. Although LLC companies’ procedures and incorporation procedures are generally similar, costs can vary from state to state due to required permits and processes.
- LLC formation processes are high-speed. Today, all LLC establishment procedures can be done online. In some states, such as Wyoming, it takes only two days to form an LLC. However, there are states where the LLC formation process takes two weeks.
- If you want to form an LLC outside of your US state or if you already live outside the US. You must select a state where the LLC will be headquartered. Each state in the USA has its own rules. LLC setup fees, taxes, annual reporting costs vary by state. At this point, states such as Delaware and Wyoming are the most preferred states by foreign investors.
- After the state election, you must determine the name of your company. By checking the state database, you must select a company name that has not been registered before.
- You need a phone number for the company setup. At this point, you can use your own number, but there is no harm in using numbers that you will get from companies that provide virtual phone number services.
- Select a Registered Agent that provides LLC company formation service. People who have not done company establishment procedures and do not know about such companies can find many companies that will provide this service in the state they wish by doing short research on google.
- After choosing the Registered Agent, you can apply through the company’s website (Registered Agent site).
- You need an EIN (Federal Tax Identification Number) to open a bank account after LLC setup. The EIN is issued free of charge by the US tax agency IRS.
Which State is Most Advantageous to Form an LLC?
Matters such as company incorporation costs, taxes, audits, and company partners’ privacy rights vary by state of incorporation. Suppose an investor wants to establish a local company in their city of residence. In that case, they may not consider such criteria, but if you are going to make a significant investment and you do not have a location problem, choosing the correct state is a vital issue. Especially e-commerce-oriented businesses, software companies, companies doing national or international business, establish companies in states that are advantageous in terms of tax and legislation, especially Delaware.
a) Overheads: It can sort the general expenses of a company by starting with items such as rent expenses, vehicle expenses, office expenses. These expenses vary according to the population density and popularity of the city where the company will be established. In short, the company’s expenses to be established in a more popular and crowded city will be high, but it will be easier to find qualified personnel and managers, find customers, carry out sales and marketing activities and reach more suppliers.
b) Finding Qualified Employees: A big city means a bigger population. In other words, there will be more options to find more qualified employees. Big cities have advantages such as more social opportunities, more job options, and more qualified school options for employees. In short, big cities are advantageous in terms of employment.
c) Transportation of Employees to the Company: The company must be in an easily accessible location. This is preferred for both employees, customers, and suppliers.
d) Marketing Opportunities: Even if a company does business on a national scale, its location will always be its primary market. A company can run campaigns in the city where it is located for faster and less costly marketing and sales. The location advantage reduces logistics costs and prevents loss of time to reach the target audience.
e) Tax Rates: The tax rates withheld from companies vary in the states of America. Withholding taxes are not standard. In this regard, it may be logical to establish a company in a state with a low tax rate.
f) Legal Procedures: Each company is subordinate to the state court in which it was founded. It is possible to say that some state courts help entrepreneurs, while some state courts make it difficult for entrepreneurs. Therefore, before establishing a company, it should be determined which state is entrepreneur-friendly.
Benefits for the State of Delaware LLC formation
- A general business license is not required.
- The share certificate is not mandatory.
- There is a concession tax.
- Unlimited stocks are allowed.
Benefits for the State of Wyoming LLC formation
- A general business license is not required.
- A share certificate is mandatory.
- There is no concession tax.
- Unlimited stocks are allowed.
Benefits for the State of Nevada LLC formation
- A general business license is required.
- The share certificate is not mandatory.
- There is no concession tax.
- Unlimited stocks are not allowed.
States with Low or Zero Income Tax:
Alaska, Alabama, Colorado, Dakota, Georgia, Florida, Hawaii, Texas, Washington
States with Low State Tax and Sales Tax for LLC:
Alaska, Hawaii, Maine, Wisconsin
The Main Features and Advantages That Makeup LLC Companies
- LLC, in a sense, is an advantage package for entrepreneurs, combining the most advantageous company features. With the tax advantage in sole Proprietorship and partnership type companies, Corporation provides the advantages of minimizing personal liability in companies at the same time.
- LLC owners are not liable for debts arising from the business transactions of the company. For example, if an LLC subsidiary goes bankrupt because of its debts, the LLC owner’s personal assets or other companies cannot be liable for the debt. This advantage enables LLC owners to make bolder business moves and take risks as entrepreneurs. In LLC Companies, you only risk your investment in the company.
- The management fees received by the partners from LLC companies are deducted from the company profits.
- In terms of company formation processes, LLC is a more flexible and easier type of company to set up.
- The LLC board of directors and partners do not need to meet regularly. LLCs are less regulated by government agencies.
- The most important disadvantage compared to corporations is that LLC Companies cannot go public. At this point, it may not be preferred for a company that is likely to grow, or it may be changed if the company reaches the size of going public.
- LLC companies are not subject to company-level taxation (Pass-Through Taxation), just like partnerships, S Corporation’s sole proprietorships. Company owners and partners declare their business income and pay business taxes on their personal tax returns.
- There are no restrictions on LLC company ownership or partnerships across US states. Investors, corporations, foreign nationals, foreign entities, and even other LLCs can become LLC owners or partners.
Documents You Need To Create an LLC
The documents required during LLC formation and their contents vary from state to state. Listed below are seven essential documents that will suffice to form LLCs in most states across the USA. However, different licenses, permits, and documents may be required depending on the state where the LLC will be established or the business branch of the company to be established.
2. Name reservation application
3. Articles of organization
4. Operating agreement
5. Initial and annual reports
6. Tax registrations
Steps to Form an LLC
1.Choose a name for your LLC: The LLC name to be established must not be registered in that state before. The LLC name must end with Limited Liability Company or the abbreviation Limited Company or LLC. For example: “Sun and Earth, LLC.” “HapyLand, LLC”
2. File Articles of Organization: Articles of organization could be completed online or by using a form available on the Secretary of State’s website. In this section, LLC’s name, address of its registered agent, and other essential information are needed.
3. Choose a registered agent: The registered agent must be a registered agent in the state where the LLC will be formed.
4. Decide on members vs. manager management: Most LLCs choose the owner and partners as managers during the incorporation phase. However, you can also register an external administrator as administrator during the installation phase.
5. Create an LLC operating agreement: It is generally recommended to draw up an operating agreement for your LLC. It is not mandatory to prepare the agreement in many states and present it with the company incorporation paperwork.
6. Comply with other tax and regulatory requirements: If an LLC has more than one founding member, it must obtain its own IRS Employer Identification Number (EIN). So this process is mandatory for LLCs that a single person does not set up, even if they do not have an employee yet. You should issue a business license at this stage, and due to your company’s line of business, it may be necessary to prepare more than one license. LLCs are required to register with the state tax office if they are going to shoot goods.
7. File annual reports: Many states in the USA require that an annual report be prepared on the operation of the company and the required fee to be paid for the approval of this report every year during and after the establishment phase.
8. Out of state LLC registration: If you are going to form an LLC in a state other than the state in which you live, or if you live outside of the United States, you must file through an agent registered in the state in which the LLC will be formed.
LLC Pros & Cons
LLC’have many advantages, and its also more flexible than corps and more secure than “Sole Proprietorship.” In every case, before making any business structure decisions like LLC or corp, weigh the pros and cons of each and compare each entity and do your homework beforehand.
- LLC have liability protection for its members
- LLCs are pass-through entities for tax purposes
- LLC is more flexible in management than corporations
- LLC is also more flexible in allocating income and losses than corporations
- Some states charge additional fees for LLCs.
- LLC income could be split, but you cant pay self-employment or payroll taxes like S corporations.
- There are some restrictions on LLC membership transfers
- Some of professions as attorneys and doctors cant establish an LLC in some of the US states
Using DBAs for LLCs
For LLCs: If you have formed a corporation or LLC, you do not need a DBA as you have already registered your business name. However, you must obtain a DBA if you plan to do business using a different name than the name given with your LLC/corporation paperwork.
A DBA for LLCs or corporations allows you to manage multiple businesses without having to set up a separate LLC or Corporation for each business. Your business may have multiple websites, different names for different affiliates. Let’s explain more clearly. Using a DBA, an LLC can use another name for the restaurant chain it owns and another name for the caterer. You can create a company with a single name and use a separate DBA for each business. In this way, you can manage your affiliates, which look like businesses with different names, through a single company, so your paperwork and expenses will be reduced.
LLC & Business License: Which One Is First
Forming an LLC and obtaining a business license are two different things. Most businesses, even freelancers working from home, need to set up some license. In short, a business license is a legal document that enables the business to start operating at any company establishment stage. LLC, on the other hand, is a type of company. One of the documents required to set up an LLC is the Business Licence.
Is there a priority order to form an LLC or obtain a business license? To avoid legal trouble later, you must form an LLC before obtaining a business license. Some companies set up an LLC after obtaining a business license. This may cause some problems with the application.
For example, imagine that your company has more than one subsidiary. If the activities of one of the company’s affiliates violate any local regulations, the company may be subject to fines and sanctions against business assets. If you set up an LLC first, you can get a DBA, get the business license through it, and create each of the subsidiaries without mentioning the parent company. If you acquire the LLC after the business license, you will need to request a business name change from the licensor. This will lead to extra expenses and loss of time.