When you launch a new business, one of the first decisions you have to make is the type of legal structure you’ll choose. Your decision to operate as a Sole Proprietor, to form a Corporation, or to register as a Limited Liability Company (LLC) can affect virtually every aspect of your business, from taxes to payroll.
There’s not necessarily one right answer here, but many small businesses benefit greatly from the LLC model. As you prepare to register your LLC, it’s important to recognize that the stipulations vary a little bit from one state to the next.
What is an LLC?
Before we get into state-by-state variations, let’s step back and consider the big picture: When we talk about an LLC, exactly what are we talking about?
When you first start generating any kind of income on the basis of self-employment, the government classifies you as a Sole Proprietor. This basically means there is no legal distinction between yourself and your business venture; no way to separate personal assets and liabilities from business ones.
When you firm an LLC, you actually do create a distinct legal entity, and a way to keep assets and liabilities in separate columns. More importantly, this allows you to maintain personal liability protections. If someone brings a lawsuit against your LLC, your personal and familial wealth can be kept safely off the table.
Why Register an LLC?
Many small business owners prefer the LLC model because it combines the personal wealth protections you’d get with a Corporation with the ease and flexibility of a Sole Proprietorship. Some additional benefits of the LLC format include:
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Pass-through taxation.
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Enhanced professional credibility.
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More options for business loans and lines of credit.
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Flexibility with respect to how you manage daily operations.
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Much less regulatory overhead than with a Corporation.
How to Register an LLC
It’s also important to note that registering an LLC is generally quick and easy… although the specific steps can vary a little bit depending on which state you’re in.
We’ll get to that shortly. First, here’s the general framework for LLC formation.
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Choose the state you’ll register in. Technically, you’re allowed to register in any state you want. The trouble is, if you register in a state other than the one you live and operate your business in, you’ll likely be on the hook for taxes and fees in two states. As such, it’s usually best to register in your home state.
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Select a name. You’ll need a name for your LLC that isn’t already in use by another LLC in the same state. Most states offer searchable databases you can use to ensure the name you want is still up for grabs.
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Appoint a Registered Agent. Your Registered Agent is a person or individual tasked with receiving your business’ legal and tax correspondence.
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File Articles of Organization. This is the legal document that officially establishes your LLC. You’ll file with your Secretary of State.
Though not legally mandatory, you’ll likely also want to create an Operating Agreement and to request an EIN from the IRS.
LLC Variations, State by State
As you prepare to register your LLC, it’s always wise to check the specific rules and regulations in your state. LLC registration can vary according to a few different categories.
Taxes
No matter which state you register your LLC in, you’re free to file your taxes on a pass-through basis, or to opt into corporate taxation.
However, it’s also important to know that some LLC-specific taxes may be levied. As of right now, the only state to have a tax specifically for LLCs is California, where LLCs must pay a flat rate of $800 annually.
Registration Fees
While not every state has LLC taxes, every state does have a registration fee. You’ll need to pay this fee when you file your Articles of Organization with the Secretary of State.
The specific amount can vary quite a bit depending on which state you’re in. In some states, the registration fee can be as little as $20. In some states, it’s as much as $300. Again, you’ll simply need to double check with your state.
Registration Timeline
How long does it take to get an LLC registered? That’s another element that can vary depending on the state. On average, you can expect your LLC registration process to take between two and four weeks. Also note that in some states you’ll be able to pay a little bit extra to expedite the process, potentially getting approval in just a day or two.
Registered Agent Concerns
When it comes to choosing your Registered Agent, there are a few qualifications that are true across the board.
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No matter which state you’re in, you can choose either an individual or an organization to serve as your Registered Agent.
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Your Registered Agent must have a physical mailing address in the state where you’re registering. A PO box won’t suffice.
One thing that can change from state to state: A few states actually allow you to serve as your own Registered Agent. Most states prohibit this, and in fact it’s very common for LLCs to hire third-party LLC services.
Regulatory Concerns
Finally, note that the regulatory environment for LLCs can vary quite a bit from one state to the next. You’ll always want to double check state laws with respect to annual reporting, privacy, re-registration, and other considerations.
No Matter the State, Forming an LLC Can Be Advantageous
The bottom line: Every small business owner has to make some tough decisions about the type of legal structure they’ll employ. Generally speaking, the LLC format is your best bet. Just make sure you check state-specific requirements as you prepare to get your LLC up and running.