The abbreviation LLC stands for limited liability company. It is a legal entity that has been created to own and operate a business. It is a popular entity because it has the same type of limited liability as a corporation but it is easier to form and run.
How Long Does it Take to Form an LLC?
The formation process of an LLC depends on the state. The average time is 7 to 10 business days while other states take about 4 to 6 weeks. For some states, you will get approval immediately after the articles of organization, meaning the turnaround time can be as fast as 3 business days. In some cases, it depends on the time of the year when you choose to create your LLC. For instance, some states are busier during specific times of the year so you need to plan accordingly to avoid any inconveniences.
If you want expedited processing for your LLC, you need to pay an extra fee. The state determines the additional fee. Note that, with expedited processing, the entire process could be reduced by as many as 10 days. However, even with expedited processing, you might miss on some important requirements forcing you to reapply again. Therefore, you need to be careful with the application to avoid any mistakes.
What is The Process of Forming an LLC?
Choose Your Name
You can choose any name for your business as long as it meets the legal requirements set by your state. Some rules to follow include the following:
- Make sure no other LLC has a similar name.
- It should have the LLC designation in the name.
- It should not falsely imply an association with a state or government agency.
It’s prudent to take a few days to choose different name options and do your research to avoid any issues with your LLC’s name in the future.
Preparing and Filing the Articles of Organization
Filing the Articles of Organization should take less than a day and is be filed with the Secretary of State. The Articles of Organization provides the state with the relevant information about your LLC; It contains the name, address, member’s names and the government structure of the LLC. You need to pay a filing fee after submitting the document. The total fee will be found on your state’s agency website and might vary depending on your state.
FundsNet outlines the role of an Organizer in the formation of an LLC.
Next, you need to wait for the secretary of state to approve or reject the articles of organization. If rejected, there will be an explanation of why it was rejected so you can fix it. The process for rejection or approval takes about 15 days on average.
Forming an LLC is straightforward but make sure you follow the state’s requirements to avoid any mistakes.
What are The Benefits of Forming an LLC?
Personal Asset Protection
The owners of an LLC will enjoy limited liability. As such, they will not be liable for any debts incurred by the business or any business-related lawsuits. Therefore, if creditors file lawsuits against the LLC, they can’t collect any of your personal assets such as homes, cars or personal bank accounts.
Any profits or losses incurred by the LLC will pass through the business and into the owners’ personal tax returns. The profits will be taxed at the LLC owner’s personal tax rates. As such, LLC owners will qualify for a special pass-through tax deduction rate which took effect in 2018 and will be effective up to 2025. The pass-through rate allows income tax deduction of up to 20% of the net business income that has been earned by the pass-through business.
Forming an LLC is simple and easy to operate. It is completely different from running a corporation. For instance, you don’t need to have officers and directors, shareholder meetings, board meetings or any other administrative duties that are associated with a corporation.
With regard to taxation, management and ownership, there is enormous flexibility when running LLCs compared to other types of business entities. First, there is no minimum or maximum limits on the members or owners. Also, LLCs can be managed by their members where all the owners share the responsibility for the running of the business. Finally, LLCs can choose how they want to be taxed.
Are There any Disadvantages To Forming an LLC?
Forming an LLC is more expensive than a sole proprietorship or partnership. You must pay the filing fees to establish the LLC legally. Also, there should be a written operating agreement that outlines how the LLC will be governed. Also, after formation, there will be annual fees and taxes that should be paid to the state that can go as high as $800 depending on the state.
An LLC is not the best choice if you want outside investors, especially venture capitalists, since they only fund corporations.