How to Become an LLC: 5 Easy Steps
If you have your own business, you may benefit by forming an LLC. An LLC keeps an owner’s personal assets separate from any business assets. LLCs can protect owners from liability in the event of a legal dispute with a creditor, or even a business partner. This is true even if your business does not have any employees. Forming a single member LLC (an LLC that consists of just one person) offers the same perks as forming an LLC with multiple members.
But how do you become an LLC, and how can it benefit your business? Here’s what you need to know.
Why Form a Single Member LLC?
Technically, anyone can become a single member LLC. Freelancers, contractors, photographers, and musicians may choose to become a single member LLC to legally separate their professional operations from their personal assets, like their home, car, or savings. In the event of an issue with your business, your personal assets are considered separate and legally inaccessible to creditors.
Becoming an LLC can also lend prestige to your business, even if that business is you. It enables you to make tax elections and lower your effective tax rate. You can expand your LLC to include more members if your business grows in the future.
When Should I Form An LLC?
Forming as an LLC can be beneficial to businesses holding any low or moderate risk assets. These types of assets are often things like equipment, real estate property, or just substantial cash accounts.
Forming as an LLC can also enable some critical business functions. Opening a business bank account is a good example. An LLC is able to obtain an Employer Identification Number (EIN) from the IRS. Banks may require your business obtain an EIN in order to open a business bank account. An EIN number can also help your business track payroll. IncNow can help an LLC obtain an Employer Identification Number from the IRS.
How Do You Become an LLC, Exactly?
IncNow and some other registered agents make the process of becoming an LLC easy for you. In general, you’ll want to follow these steps:
1. Decide on a name for your company:
It can simply be your name, or it can be a more typical company name that reflects the work that you do. Note that the company name should end in “LLC”.
2. Check the availability of your company name:
IncNow can check the name with the state of formation for you, as well as a second choice, if you are considering alternative names.
3. Select a registered agent.
Many people choose to incorporate their companies—including single member LLCs—in Delaware due to its business-friendly laws. While you don’t need to live in Delaware to have a Delaware LLC, you do need to have a registered agent in the state of Delaware. This is a person or company who forwards important legal correspondence from the state to you. IncNow can help serve as your registered agent for a small fee.
4. Fill out an online form.
Just provide basic information, like your company name and your contact information. The whole process takes five minutes or less. You’ll be issued a filed copy of your Delaware Certificate of Formation after the state of Delaware approves it.
5. Create your single member LLC operating agreement.
This is an important step that’s often overlooked. Single-member LLCs should have an operating agreement. This written document establishes that you are separate from your business entity, and that you are the owner and manager of your LLC.
How Is An LLC Formed?
An LLC is formed through filing a formation document with the Secretary of State. In Delaware, this document is called a “Certificate of Formation”. Other states may utilize different names however. “Articles of Organization” and “Certificate of Organization” are other common terms used to reference an LLC’s formation document.
A Certificate of Formation is typically a one page document which simply contains the name of the LLC. The Certificate of Formation also names the registered agent for the LLC. Despite being just one page, this document contains powerful language that gives an LLC the ability to shield its owners from the debts and liabilities of the business.
Becoming an LLC is an easy and inexpensive way to protect yourself from personal liability for business obligations. It’s definitely worth considering if you have your own business—even if that business is you. Plus you can tell your friends, relatives, and more importantly, your customers and vendors, that you are a business owner.