A Comprehensive Guide on Forming a Limited Company

A lot of sole traders and partnerships decide to form a limited liability company not just because they offer personal liability protection, but also because these popular structures also come with attractive legal and tax benefits. Setting up a limited liability company is quite easy these days. Sure, there are numerous accountants, lawyers and a horde other service companies who are willing to help you out, but they only help with half of the process. It is better for you to do the work yourself because it is going to save you a lot of frustration and money. But, where to begin? Luckily, there are a few simple steps you need to follow and be on your way and they are listed below:

Find your LLC laws 

This you can do by following the instructions outlined below:

First you need to visit the Limited Liability Company Center. A citation is provided by the Center to every state’s law dealing with LLCs. A citation is basically the section, title and chapter of a law that’s used for locating the specific law within the larger federal code or larger state.
A list of links is provided and you have to opt for your state and take a look at the citation to your state’s LLC laws.
Run the citation in your favorite search engine and use quotation marks for getting the best search results.

Choose the state where you wish to operate 

Lots of business owners form their company in their own state, but some may have the option of forming an LLC in a different one. Making an LLC in your home state is recommended in the situation when you will be leasing or owning office space and hiring employees in your own state. On the other hand, you can form an LLC in a different state if you plan to operate online and you don’t want to have a physical location anywhere. In this case, incorporating an LLC in another state can provide you with some tax benefits.

Review the LLC laws in your state concerning names 

The laws covering the naming of Limited Liability Companies are different for each state and the restrictions and requirements include:

The name of the firm must end with the designation ‘Limited Company’, ‘Limited Liability Company’ or even an abbreviation such as Ltd Liability Co, LLC or L.L.C.
The name should be unique and not be the same as another LLC in the state.
The name shouldn’t include some prohibited words such as ‘trust’, ‘bank’ and ‘insurance’.

Select a name for your company 

Now, it is time for you to choose a good name for your LLC that is in accordance with the laws. You should ensure that the name you choose is memorable, distinctive, easily spelled and pronounced, distinguished from your competitors and, if possible, should suggest the products and services you offer.

Determine if the name is available 

If you are forming a limited company in one state, but will be working in another, you should ensure that the name you have chosen is available in both as the law may require you to register in the state where you do business. You can do a search at the Limited Liability Company Center to check for the name’s availability.

Go with a registered agent 

A process agent or a registered agent is a person who chooses to accept legal service if your limited company becomes involved in a lawsuit. They need to be a resident of the state where you are forming your limited company. You can become a registered agent, ask your attorney to be one or even hire one.

File your Articles of Organization or Formation 

Lots of states are now offering businesses the ability of filing the Articles of Formation and Organization online. The Secretary of State website of your state will provide you with the necessary instructions you need to follow.

An operating agreement needs to be prepared and executed 

An operating agreement is basically a contract between the owners of the limited company that covers aspects such as initial members, their invest and interest in the company, profit and loss sharing ratio, procedure of adding new members, voting powers, resignation of current members and rules governing meetings.

Get an Employer Identification Number (EIN) 

Unless there is only one member in your LLC and you intend to file your taxes as a disregarded entity (including business income and expenses with personal income taxes), you should get an EIN. You have to visit the IRS website to get your Employer Identification Number. Once you have submitted an online application, you will immediately be provided with an EIN.

File Internal Revenue Service (IRS) form, if needed 

Since a limited liability company is a state entity, the IRS does not recognize it for purposes of income tax. Therefore, it is essential for every limited company to decide whether it wishes to be classified as an association taxed like a corporation, a partnership or a disregarded entity. If you have more than one member in your limited company, you cannot be classified as a disregarded entity. If you don’t fill this form, your company is going to be automatically classified as a partnership. The required form can easily be found on the website of the IRS.

With these steps, your formation of a limited company will be complete and you can go about your business. As a small business owner, this form of organization can give you the same benefits as a corporation, but save you from the burdensome formalities that are associated with it. This simplicity is the primary reason why the concept of forming a limited liability company has gained instant popularity for small businesses with one to three owners. Since they don’t plan to grow significantly or expect huge profits, they prefer to form a limited company as it is a hybrid entity offering you the best features of corporations and partnerships. 

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