LLC Formation Requirements For US Entrepreneurs in 2021
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In the early stages of the pandemic, the US Census Bureau’s monthly and weekly Business Formation Statistics revealed a large drop in new business applications, but a recovery in the second half of 2020. This growing trend in business applications is expected to continue through May 2021.
Anyone starting a business in the United States and searching for a legal entity that can expand with them is likely to consider a variety of options. The type of business structure you choose can have a big impact on a lot of things in your life as a business owner. Your exposure to liability, as well as the amount and manner in which you and your firm are taxed, are all considerations. It can also have an impact on your business’s finance and potential to grow, as well as the number of shareholders and overall management style.
The Small Business Job Protection Act of 1996, which featured a number of changes to basic corporate tax law, including the ability for S corporations to own any percentage of stock in C corporations, catapulted both LLCs and S corporations to the forefront. The question begs to differ, LLC or S Corporation?
Limited Liability Company (LLC)
Limited liability corporations (LLCs) are popular because of the basic benefits of liability protection. They are often utilized by a sole proprietor (single owner) or a company with two or more owners (partnership). Personal assets are protected by LLCs from company losses, debts, and judicial judgments. Because LLCs are taxed differently than traditional corporations (also known as C Corporations), they may offer tax advantages.
Why LLCs are popular
As previously stated, an LLC gives limited liability to the owner or owners, meaning that each owner is not personally accountable for any company-related litigation or obligations. Creditors cannot seize or collect monies from your personal assets to pay off the business’s debts, in other words. Only the company’s assets are subject to seizure by creditors. LLCs are less complicated to set up and administer than corporations. Meetings of directors, officers, and the board of directors are essential for corporations.
Because the company’s profits and losses are reported on the owner’s personal tax return, LLCs have tax advantages. When the owner receives a salary from the company, the profit earned by the business is not taxed both at the business and personal levels. Rather, the profit earned by the business is routed through the business entity and reported just once on the owner’s personal tax return for tax purposes.
LLCs also have the advantage of being able to be structured in a variety of ways. There are no limitations on the number of members an LLC can have, and it can function as a sole proprietorship with just one owner. The owner of an LLC can also appoint a manager to run the business, who can be one of the designated members, a non-member, or a combination of the two.
LLC formation requirements
When opposed to a corporation, the LLC has fewer filing obligations, which gives it a lot more flexibility. An LLC might be a single-owner company, a partnership, or a group of people. Individuals, businesses, other LLCs, and international entities can all be members. A limited liability company (LLC) can have as many members as it wants. Certain structural characteristics, on the other hand, are required for an LLC. These requirements include:
Business Name
Your LLC must have a distinct name that is not the same as or confusingly similar to that of another business. The term ‘LLC’ or ‘Limited Liability Company’ must also be in the name. It is normally forbidden to use the terms ‘Inc.’ or ‘Incorporated’ in the name of an LLC. Finally, the usage of financial terms such as ‘Bank,’ ‘Insurance,’ or ‘Trust’ is often prohibited. When forming an LLC, incorporate.com will adhere to each state’s specific name regulations.
Registered Agent
A registered agent is a point of contact for all formal papers in some states. In many cases, the registered agent must be a physical resident of the state in which the business is formed. The agent does not have to be an LLC owner or employee. As part of your LLC formation package, incorporate.com offers registered agent services.
Operating Agreement and Articles of Organization
While an Operating Agreement is not required by the state when forming an LLC, it is extremely important. In fact, it’s preferable to have the Agreement in place before submitting any paperwork to the state. You won’t have an angry partner pull out at the last minute, and you won’t be able to add a new member you wanted. The Operating Agreement spells out a number of crucial details, such as the LLC’s management structure, additional capital investments, profit distribution, and what happens if a member leaves or passes away. As you run your business, courts, investors, banks, and creditors will need this written agreement.
Filling out an Articles of Organization form is the first step in the LLC application process. This is a legal document that must be filed with the state where you intend to start your business. This document is known by a variety of titles, including Certificate of Organization and Certificate of Formation. To form an LLC, each state has its own form that must be filled out. A Limited Liability Company Application may be required in some states. incorporate.com will utilize the information you submit to correctly fill out the form for the state you choose.
Final Thought
LLCs are less expensive to start, manage, and stay compliant with applicable business laws since they have fewer operational restrictions and reporting obligations. However, if the company plans to obtain considerable outside cash or issue common stock in the future, the corporation format is preferred.