All About LLC’s
Many people opt to start an LLC otherwise known as a Limited Liability Company. Wondering what a Limited Liability Company is? Want to know if a Limited Liability Company might be a great option for your company? Stay with me while we enter into a quick tutorial on all about llc’s.
What is an LLC?
So what exactly is an LLC anyway? An LLC is a type of business entity that protects its owners from personal liability for the business debts and liabilities. LLCs are a hybrid between corporations and general partnerships.
LLCs have Members and Managers. Members have ownership rights and share in the profits and losses. Managers are the persons who can make binding decisions on behalf of the LLC. A person can be both a Member and a Manager of an LLC.
There are two types of LLC’s. An LLC can be a single member LLC which means one person is the sole operator of the LLC and is also the manager for the LLC. Or, an LLC can be a multi-member LLC. A multi-member LLC has more than one Member. All of the Members or a select person or persons can also be Managers of the LLC.
How Do I Start an LLC?
To start an LLC, you first need to decide on a name for your LLC. You then should search your state’s Secretary of State database to make sure the name you have chosen is not being used by another company.
Once you have decided on a name, yu will then need to decide whether your LLC will be a single member LLC or a multi-member LLC. Who is going to be the Manger or Managers? Then you need to determine who is going to be the registered agent or the person responsible for receiving legal notice on behalf of the LLC. What will be the mailing address and phone number for the LLC? Have you set up an email address for the LLC?
Once you make the above decisions, you need to file an Articles of Organization with your state’s Secretary of State and pay the applicable filing fee. Articles of Organization contain most of the above information. You file the Articles of Organization and hopefully the Secretary of State approves your Articles. If so, you receive a time-stamped certification that your Article have been filed. Congratulations, you are now an LLC.
Obtaining an EIN
Now that you have your LLC registered with your state’s Secretary of State, you will need to obtain an Employment Identification Number or EIN. An EIN is used to identify the business entity. You will use the EIN to open bank accounts and for income reporting to the IRS.
So, how do you get an EIN? You file an SS-4 application with the IRS. The IRS allows you to obtain an EIN by going through a series of questions to complete the application. The application asks for the name and social security number of a responsible party (ie you); the address of the company; where the company is registered and what type of business the company engages in or will engage.
The Operating Agreement
Next, you need to create a written operating agreement for your LLC. The operating agreement covers how the LLC will be run. The agreement outlines such matters as how financial and other matters will be made. It includes key provisions on rules and regulations for the members. Essentially, the operating agreement outlines:
- Divison of ownership percentages;
- The management structure including member’s roles and responsibilities;
- How decisions will be made;
- What happens if a member wants to leave; and
- What happens if the business closes.
You should have an operating agreement in place to prevent misunderstandings and issues in the future. Plus, most banks and investors are going to want to see an operating agreement to make sure the business is legitimate. An operating agreement gives your company credibility.
Every year that you are operating an LLC, you must file an Annual Report with your state’s Secretary of State. In North Carolina, annual reports are due by April 15th every year after the year of creation. The cost of filing an Annual Report in North Carolina is $200.
With the Annual Report, you essentially update your business information. You verify the correct address, phone number and registered agent for the LLC. You also list all current members of the LLC along with those members. names and addresses.
Here in North Carolina, the North Carolina Secretary of State has pre-populated Annual Reports on their website. This makes it very easy for LLC owners to complete and file the Annual Reports.
Generally, LLC’s are taxes as pass through entities. What this means is that the LLC is not taxed individually. Instead, the LLC’s profits and losses are distributed amongst the members per their ownership interests. The members then report their share of the LLC’s profits and losses on their own individual tax returns.
If the LLC is a multi-member LLC, then the Manager. must prepare and give each Member a Schedule K-1 by March 15th of each year the LLC is in operation. The members must attach the Schedule K-1 to their individual tax returns.
You should check with your accountant or CPA for more information about filing LLC taxes.