A lot of people dream about becoming an entrepreneur. Today, that dream is easier to achieve than ever, as is evident by the growing number of business registrations, as reported by the United States Census Bureau.
However, there are a lot of factors to consider when starting a business. You have to consider things like the type of business entity, tax classification, and legal compliance requirements of your business. More importantly, you would want to protect yourself—the business owner—from liability risks.
In this article, we dive deeper into limited liability companies (LLCs) and see how public benefit corporations (PBCs) like ZenBusiness can help make the processes easier and faster for business owners.
ZenBusiness is a public benefit corporation that can help business owners form an LLC and protect themselves against business liabilities.Learn more about ZenBusiness.
What Is an LLC?
To limit your legal liability as a startup owner, you are encouraged to form an LLC—short for limited liability company. An LLC gives you legal status as a startup owner, and you can form one with one or multiple parties. It also gives you the same benefits as corporations without the associated cost and lengthy procedures.
The bonus: You can form an LLC for a startup of any size—whether sole proprietorships or partnerships. In fact, there are practically no limits to the number of people who can be registered in an LLC.
What Are the Benefits of an LLC?
- Asset Protection. LLC separates your personal assets from your business assets. This means that your personal assets will not be claimed for any debt or losses incurred by your startup.
- Fuss-Free Formation. LLC formation is fast and straightforward. There is no need for a board of trustees, countless board member meetings, or back-and-forth paperwork to make a decision.
- Flexible. LLC comes with a lot of flexibility since it can be formed by either one person or hundreds of people. In a nutshell, LLC operating agreements can be modified as the business’ needs change.
- Tax Cuts. Since LLCs are pass-through entities, members can benefit from special tax cuts such as the “pass-through deductions,” according to the Tax Cuts Jobs Act. This allows a deduction of up to 20 percent of net income for pass-through (LLC) businesses.
- Pass-Through Taxation. Pass-through taxation entails that profits or losses from your startup are taxed at your personal tax rates. And if the startup is registered with two or more members, it is considered a partnership. Profits are then taxed at each person’s tax rates, which means that it is registered in their tax returns.
Requirements for an LLC
Applying for Articles of Organization is considered one of the most critical steps of registering your startup. Before filling out the form, ensure that you have the following ready.
- Startup name
- Contact details
- Registered agent
- Management structure
- Effective date
- Signature and notary
You may also need to provide supplemental documents to explain each of the requirements mentioned above.
5 Steps to Limiting Your Liability with an LLC
Each state has a slightly different way of LLC applications. However, the process often boils down to the following steps:
Step 1. Choose a Company Name
Your startup name is an essential factor because every entity needs an identity—something to be known by. Although every state has a different requirement for naming businesses, you are usually required to choose a name not already registered with any other LLC in the state.
Step 2. Appoint a Registered Agent
A registered agent is an individual or legal entity that acts between your startup and the State. They operate on your behalf and receive documents such as government correspondence, legal documents, notices of lawsuits, and tax forms. You can also be your own registered agent if you have a registered physical address (PO Box not allowed).
That said, you can also have a third party such as ZenBusiness act as your registered agent. Choosing this route will save you a lot of stress, give you privacy, and ensure that you are compliant.
Step 3. File Certification of Formation
The certificate of formation is known by many names depending on the state where the LLC is filed. But regardless of the term, it is the document containing all the details of your startup, such as the number of members, address, contact, management structure, and more.
Step 4. Get an Operating Agreement
Although not required in every state, getting an operating agreement can save you a lot of stress and avoid disagreements, especially for partnership-based LLCs. This vital document highlights the responsibility of each member, succession plan, voting power, and liability against personal assets. It is even simpler with an already-made template, like this operating agreement template created by ZenBusiness.
Step 5. Get an EIN
An EIN stands for Employer’s Identification Number and the business equivalence of a Personal Security Number. If your startup has at least two partners or employees, you must have an EIN. After you have officially formed your LLC, you are encouraged to register your startup with the federal government by applying for an EIN with the IRS.
Protect Your Personal Assets and Reduce Risk with an LLC
Before setting up your startup either as a sole proprietor or partnership, it is essential to limit your risks as much as possible. And one way to do this is to leverage every opportunity within the law to protect yourself against potential business downsides by registering your startup as an LLC.
The process can be overwhelming, but with the help of experienced professionals, it will most likely be less stressful and error-free. To that effect, ZenBusiness has positioned itself as a leader in helping startups grow by doing all the tedious backend work so you can focus on the front end. So start your journey with ZenBusiness by answering a few simple questions.
About us: Career Karma is a platform designed to help job seekers find, research, and connect with job training programs to advance their careers. Learn about the CK publication.