6 Things Entrepreneurs Should Know Before Forming LLCs

6 Things Entrepreneurs Should Know Before Forming LLCs

A limited liability company (LLC) is among the simplest and most preferred business structures. It’s flexible, easy to operate, and has many benefits you don’t want to miss. It combines the best features of corporations, partners, and sole proprietorships.

forming llc
Legal concept about LLC Formation with inscription on the sheet.

The best part is that it’s recognized in all states and has fewer formalities. However, the rules may differ from state to state; hence, doing thorough research before forming an LLC in any state would be best. That said, here are six things you should know:

An LLC Offers Protection Against Limited Liabilities

An LLC is a legal entity that exists separately from its owners. It can own properties, sign contracts, sue, and be sued. This means the court won’t hold you responsible for its debts, taxes, and other legal liabilities.

Generally, an LLC offers protection against limited liabilities. It’s one of the reasons why many business owners prefer forming this business structure to corporations and partnerships. If the LLC falls into debt or someone sues it in court, it’ll only freeze or use the LLC assets to satisfy obligations or any other legal judgment.

However, your assets can be at risk if you offer a personal guarantee for a business loan on behalf of the LLC. The court will hold you personally responsible, and the debt collectors can go after your assets. Also, the court may ‘pierce the veil’ and hold you personally accountable if you fail to maintain corporate formalities. If you fall into a legal predicament, the best step is to bring your attorney to help you assess the situation.

You Can Partner With A Non-US Citizen

Another crucial thing to know about forming an LLC is that it allows you to partner with a non-US citizen. It gives you access to additional capital, technology, new markets, and diverse skills and knowledge to help you differentiate your LLC and gain a competitive edge.

However, you must be a resident in the state of formation and have a registered agent in the same state. If you’re a non-US resident operating a US LLC, consider opening a US business bank account for non residents to manage your finances. To open the account, you’ll need documentation proving your identity and owning the LLC. You may also want to bring in an attorney to help you.

An LLC Has A Flexible Management Structure

You’ll form your LLC under state law, and as mentioned, it’s flexible with few legal formalities. You can run and manage your LLC, employ more team members, and add more owners and managers.

Deciding on the management structure of your LLC is crucial as you must also include it in the articles of organization. Your LLC can be manager-managed or member-managed, depending on your agreement with co-owners and how you set it up.

An LLC is manager-managed when there are many members in the organization, but only one or two people run the daily business operations. Mostly, this happens when the members don’t want to be involved in the decision-making and day-to-day operations.

In a member-managed LLC, on the other hand, the members engage in decision-making and the business’s daily operations. However, it’s only functional when there are a few members.

An LLC Has A Simple Formation Process

You can get an LLC up and running within a few days, as it has fewer legal formalities, unlike corporations that take weeks or months. It also has fewer ownership restrictions which reduce the complexity of the formation.

The best part is that you can also form an LLC in any state by yourself or with the help of a licensed professional. However, the requirements and formation fees may vary from state to state, but mostly the formation steps remain the same. They include the following:

  • Naming Your LLC: The first thing you must do to form an LLC is to decide on a name. It should include the phrase ‘Limited Liability Company’ or the abbreviation ‘LLC.’ Also, it must be unique and available in the state of formation, meaning no other business should have a similar name. You can check with the Secretary of State’s office or use their online name search tool to see if the name is available.

The name must also be distinguishable from government agency names like the CIA, FBI, State Department, or others. This means that no one should confuse your LLC for a government agency.

You should also secure a name with an available URL. It’ll come in handy when creating an online business.

Just remember to keep the name simple and memorable. Also, avoid using buzzwords as your LLC’s name, as they’re only trendy for a short time.

  • Appointing A Registered Agent: The next step in forming an LLC is hiring a registered agent to act as a bridge between your LLC and the state. They’ll send and receive tax and legal documents on your behalf.

The agent can be a business entity or an individual. However, they must be registered and have a physical address in the state of formation. They must also be available for all legal summons and be of legal age.

Some states may even allow you to be your own registered agent. However, it’s inconvenient as all agents must be at their registered physical addresses from Monday to Friday, 9 am -5 pm, which may hinder your focus on your primary business operations.

  • Getting And Filing Articles Of Organization: You must file this legal document with the State Department to form your LLC officially.

The articles of organization, also known as certificate of formation in some states, contains your LLC’s basic information. It outlines the name of your LLC, the purpose of doing business, the management structure, your agent’s contact information, and your LLC’s physical address. It’s also where you specify the management structure of your organization.

The best part is that you can file this document in person, online, or by mail. However, you’ll have to pay a non-refundable fee, which varies depending on the state of formation.

  • Creating An Operating Agreement: It’s also known as a membership agreement. It’s a written or verbal legal document containing ownership and operation details, such as profit-sharing ratio, dissolution terms, new member onboarding, capital contributors, and the management structure. It outlines the responsibilities of each member, ensuring everyone is on the right page.
  • Obtaining An EIN: You must also obtain an Employer Identification Number (EIN) or the Federal Tax Identification Number (FTIN) from the IRS. It’s a business security number the IRS gives to US businesses for free to help them track companies’ tax status and legal operations.

These are the common formation steps in many states. You must, however, check with your local department for additional formation documents. The state may require you to have more licenses and permits, depending on the business operations you engage in.

You may also want to consider opening a business bank account to separate your personal and business finances to keep them safe from LLC lawsuits and debts. Also, consider hiring an accountant to help with your tax calculations and get a business credit card. It’ll help you establish a business credit store and track the company’s expenses.

You can also get business insurance coverage to protect your LLC from unavoidable risks. The most basic covers you need include workers’ compensation, general liability, and professional insurance.

An LLC Saves Money On Taxes

An LLC provides tax flexibility as it lets you choose how you want to pay your taxes.

If it’s a single-member LLC, you can pay taxes as a sole proprietor, partnership, or corporation. The sole proprietorship option doesn’t apply when there are multiple members, but the IRS can still tax the LLC as a partnership or corporation.

One of the many tax benefits you get from forming an LLC is avoiding double taxation (where tax is imposed at both corporate and personal levels). It allows for pass-through taxation, where you transfer the LLC’s profits and losses to the members, meaning the LLC doesn’t have to pay federal income tax. However, the members must report their shares of gains and losses on their personal tax returns.

Also, an LLC allows for deductions on expenses. You can deduct business expenses such as salaries, rent, and office supplies, reducing your taxable income. You can also deduct losses from your income, reducing your tax liability.

Dissolving An LLC Is A Process

Dissolving an LLC means terminating or closing your business and ending all your operations. An LLC dissolution is a process; it doesn’t just happen overnight. For one, there must be a valid reason for the dissolution. It could be bankruptcy, death of a partner, expired operation duration, or court order.

If the termination isn’t court-ordered, it must be voluntary. Therefore, members have to vote and approve the dissolution. Once the voting is complete, you file your final tax return. You may need a tax verification or clearance form, depending on your state of formation. You must pay any tax dues your LLC owes and state it’s your final tax payment to get an IRS letter relieving you of the tax liabilities.

You’ll also need to notify your investors, creditors, and clients about the dissolution and cancel all work permits and licenses. Depending on your operating agreement, you may have to distribute the LLC assets to members after paying all your taxes and debts, if any.

Lastly, you must file articles of dissolution to dissolve your LLC officially. In this document, you state your LLC name, the name of members, and asset distribution. Once the dissolution is complete, the state will send you a certificate of dissolution. However, your formation state may require you to pay a fee for this service.


An LLC is the most preferred form of business entity because of the flexibility, limited liability, and tax benefits it brings to the table. Starting an LLC isn’t that challenging; you just need to find a unique name and hire a registered agent to help you file the articles of organization and create an operating agreement. Also, check with your state department for additional permits and licenses you may need to operate your LLC. However, you should remember that different states have different rules and regulations regarding LLC formation.


Write a Comment