It can be a pretty intimidating idea for a lot of people to start a business. You’re probably wondering how to form a LLC because either you want to understand the process or are researching how to avoid paying the high costs of a lawyer or accountant.
I’m going to try to gleam some knowledge on the experience I have had in forming my own companies with and without help from other company formation services.
|Disclaimer: This is not any sort of formal legal guidance. If you are still unsure of what to do after reading this article, I suggest you consult with a professional such as your accountant, lawyer, or company formation service representative.|
Determining Your Business Structure
In today’s litigious society, it makes no sense whatsoever to form your business as a doing-business-as (DBA) sole proprietor. I will not cover that structure at all as it exposes the business owner’s assets in any liability suit and is not worth mentioning aside from you can start a business today without actually filing any formal paperwork.
Also, I won’t cover C-corporation structures. These typically are not formed by anyone just starting a new business because they can open yourself up to double-taxation which is something we always avoid.
Whichever structure you choose, there are different tax ramifications at both the Federal and State level, so before filing you should understand those as well. I’ll do my best to cover the pros and cons of these structures.
Introduction to Business Structures
A Limited Liability Company (LLC) is a business structure allowed by state law. Each state can have different regulations, so you will need to check with your State to decide if forming a LLC makes sense.
Depending on the type of LLC you form, you may also need to get an Employee Identification Number (EIN). It’s like a social security identification number for your business.
Below is a brief summary of the different types of business structures in the United States:
|Sole Proprietorship||The most common form of business organization and requires little to no formal registration within your State. You report income and loss on your personal taxes via a Schedule C form. I don’t recommend this structure as it easily exposes the business owner’s personal property to liability lawsuits.|
|Single-Owner Limited Liability Company (LLC)||If you’re the sole owner of your business, I highly recommend filing as a single-owner LLC. Because the IRS considers this a “disregarded entity”, It provides you the protections of a limited liability company with the ease of simply passing through income and loss through to your own taxes via Schedule C like a sole proprietorship. An EIN typically isn’t necessary until you have employees.|
|Partnership Limited Liability Company (LLC)||Filing as a partnership requires extra paperwork, and an EIN. The IRS considers this a separate entity that has to file a 1065 form. Each partner receives a K1 form to include with their own personal tax returns. A lot more paperwork and accounting costs.|
|S-Corporation or Corporate LLC||Filing as a corporate LLC requires extra paperwork, and an EIN. The IRS considers to also a separate entity that has to file a 2553 form. Each member receives a K1 form to include with their own personal tax returns. There are some limitations on the number of owners, but otherwise this is a viable option if you plan on having more than one owner or member.|
A single owner LLC provides the protections of a LLC with the minimal overhead of a sole proprietorship.
If you’re a single owner start-up, and don’t foresee so much profit that you would jeopardize your current Federal tax bracket, then I recommend going with a single-owner (disregarded) LLC. You get the benefits of the low-cost of filing your personal returns (no additional business tax software needed) and protections afforded to a LLC entity. Mileage may vary from State to State so please check with your local regulations.
If you’re starting a business with many partners, or you foresee a windfall in profits early on that could personally put you into a different tax bracket, I would suggest either an S-corporation or “S-corporation LLC” structure. This allows you to pass income and losses on to your members but also claim yourself as an employee of the corporation to avoid impacting your income tax rates.
You can take $1 a year salary, and your dividends are taxed at a different rate. However, please, consult with your CPA to get more detail on this.
A Word about Employer Identification Numbers (EIN)
Whatever you do, do NOT, select the first link you find on Google to register an EIN. There are some real scumbag companies out there that Google allows to advertise and rank at the top of searches like “EIN registration” that will charge you hundreds of dollars to register your EIN. Worse, they make their web pages look like the IRS website. The IRS does not charge to register an EIN.
To save you the hassle of getting duped by Googling, you can go directly to the IRS EIN web page and click the blue “Apply for an EIN Online” button.
Picking a Business Name
You’re next step in the business process is picking a company name.
Your company name is your core brand, so ideally it should explain the nature of your business. However, this is not always the case as there are several companies that have catchy names that don’t relate to their primary business.
You will also want to make sure that your business name is not already registered as a trademark or a corporation within your State. This can be a time consuming process but worth the effort to make sure your business name is not already used by another company.
You will want to choose a name that has a minimal likelihood of being confused with another company. For example, you wouldn’t want to name your business “Koka-Kola.”
Business Name Searching
When I’m looking for a business name or brand, I typically follow the following search process:
- Search Google first for the name and variations of it.
- Search for the domain name on NameSilo.com
- Search the USPTO Trademark Search Engine
- I will use the Word and/or Design mark search, and search for variations in the spelling of the name I’m searching for.
- For example, if I’m searching for “T.Markey” I will also search for “Tee Marqee”. These two names are similar and could be considered trademark infringement.
- Search the State business entity search site for prior use of the name.
- Search the State trademark search engines.
- Optionally I may search other State trademark search engines if I think the name may already be in use. However, the USPTO search engine is typically the primary search source I use.
Do You Need to Register a Trademark?
The short answer is no. It’s not a requirement to register your company name as a trademark or service mark. However, if you want complete insurance that your brand is protected from jerks who may try to use the mark nefariously, then it’s an added insurance to register your mark.
The cost of a mark is relatively expensive as there is a fee for each class or category you are registering the mark in. At the time of this writing that fee was $275 per class.
How to Register and Form a LLC
In order to form a LLC, you will need to contact your local State department for businesses and revenue or visit their website. For the purposes of this article, I’ll talk about how to form your business structure in the Commonwealth of Pennsylvania.
The process is pretty similar in every State but you should check out your State’s business formation website for all the necessary information and fees. Some States have an online registration portal while others still use PDF forms that are mailed in.
Pennsylvania has both online registration and PDF forms available for registering your new business structure. I used the Online registration page found at https://www.corporations.pa.gov/ when I registered my LLC.
When you register your business structure, you will most likely need to pay a fee. For most States this is a one time filing fee. In Pennsylvania, it is $125 to form a single-owner LLC.
Considering Delaware, Nevada, or Wyoming
You may have heard that you should form your corporation in Delaware, Nevada, or Wyoming because of their “friendly” laws that are beneficial for businesses. Be aware of the ramifications of registering in one of these States.
When you register in the State within which you primarily do business, you are registering as a “Domestic” company or corporation.
When you register in another State with which you may not have a business location but want to benefit from their laws, you are registering as a “Foreign” company or corporation.
Although it is true that there are separate court systems for businesses in States like Delaware, unless you actually live in one of those States, you would need to file as a Foreign LLC in that State and then also file as a Domestic LLC in your primary State.
This essentially doubles your registration costs and overhead. Furthermore, those States typically have an annual renewal fee so you will be continually renewing your foreign LLC entity registration each year. That can add up quickly if you have to do the same as a domestic company within your own state.
You Need a Registered Agent
Finally, in each State you form your business structure, you will need to specify the registered agent for your company. This is a company/person with a mailing address within that State that is able to receive mail from the State government on your behalf.
In your own State, this would be you and your primary place of business. However, if you register as a foreign corporation in another State, you will need to hire a registered agent to send your correspondence from that State government. These agencies are an extra cost that will add to your start-up and operation costs in perpetuity.
If you don’t live in Delaware, Nevada, or Wyoming, I suggest you start by filing as a Domestic LLC within your own State first. There are a lot of hidden fees that eat up your start-up budget when forming Foreign LLC in various States.
Wrapping It Up
In this article, we’ve covered the basics of forming your business as a LLC. We’ve covered choosing an appropriate business structure, employee identification numbers, picking a name, and registering your LLC with your State.
Although I used Pennsylvania as an example, I’ve registered in Maryland and Nevada before as foreign corporations and the process is very similar. Each State has their own fees and some that are hidden. For example, Maryland requires businesses to file Personal Property Taxes each year with a minimum fee of $300! Ouch! Just be sure to understand all the costs involved before making your final decision on which State to choose for forming a LLC.
As always, questions and comments are welcome.