Deciding When, How and Why to Legally Establish Your Business
Whether you’ve been slowly building your own company for years or your Etsy business just took off unexpectedly, if you’re making money, it’s time to start thinking about your business structure.
When your passion project crosses the line to become a small business, you have a few options to legally organize your business. An LLC, or limited liability company, is one of the most popular options at this stage, because it’s easy to set up, and offers blanket protections for business owners.
What is an LLC?
An LLC is a hybrid business structure that combines the characteristics of a corporation and a partnership. Business owners receive the limited liability of a corporation while enjoying the pass-through tax benefits of a partnership. Personal liability is limited under an LLC, so any business debt, or lawsuits against the business, won’t affect the owner’s personal assets. Owners of an LLC report profits and losses on personal tax returns, not separately under a corporation. This means you only get taxed once on your income, not twice, which would happen if you were a C-Corporation.
Who needs an LLC?
Anyone who owns a small business should obtain an LLC to protect themselves from liability.
LLC Formation Steps
How do you choose your LLC name?
Your LLC will need a specific, legal name that you aren’t likely to change, or that will serve as an umbrella title for multiple, smaller organizations within your larger company profile. In most cases, the LLC name is the same as the filer’s business name, followed by “LLC,” as long as that name isn’t already taken. If that name is taken, you will need to file a variation on that name. Some words, like “trustee” or “bank,” are prohibited depending on the state. If you expect to nest multiple projects under your LLC, consider an overarching title related to your name or the general theme across your multiple ventures.
What is the process of forming an LLC?
It’s a simple process. Incorporate.com calls it the “least complex business structure” available. The specific steps each business needs to follow vary by state, and if you operate in multiple states you typically have to register in each state. An attorney in the state where your company is primarily based is best suited to help you navigate the diverse laws and determine which approach is best for you. The mechanics of the process include filing Articles of Organization documents with the Secretary of State, which includes drafting a statement declaring the purpose of your LLC, paying a filing fee, and obtaining a free Employee Identification Number (EIN), also called a Federal Tax Identification Number, from the IRS.
Do you need an attorney to form an LLC?
You can file LLC Articles of Organization without an attorney, but that process includes appointing a registered agent who will represent the LLC and receive all legal documents. The owner of the LLC is usually the registered agent as well, but most businesses appoint a third party, typically an attorney, to oversee this process. Partnering with an attorney you trust from the point of filing affords you a cohesive overview of the legal side of your business as it grows. An attorney also plays a key role in creating your operating agreement, which details the rights of the LLC owners. It’s a framework between partners, and so it may not be necessary if you’re the sole business owner, but if your business has multiple owners its terms are essential. They include the amount and frequency of capital contributions, how profits are split, who will manage the LLC, voting rights and how to dissolve if necessary or desired by any party.
Setting up an LLC is an easy and important early step that will protect you and your business for years to come. As with any legal documents, it’s smart to have an attorney look over your Articles of Organization before filing for your LLC. We regularly work with small business owners and are always happy to lend our expertise to this exciting new step in your professional journey. Contact us to speak with an attorney who specializes in business services today.