When owning a business or working as a freelancer, one must decide how to go about “doing business.” This article highlights two ways of structuring a business, and the steps needed to become an LLC or self-incorporated.
LLC stands for limited liability company. This is a business structure offering pass-through taxation and liability protection. Pass–through tax treatment means that a business’s taxes are literally “passed through” to the tax returns of the individuals who own the business. Legally, the LLC exists as a separate entity from its owners. The owner of the business is not personally responsible for business debts and liabilities. When forming an LLC, there are important steps to follow:
- Choose a State for Your LLC
- Cost, taxation, and LLC laws vary from state to state, so be aware.
- Most individuals form an LLC in the state where they live or do the most business in.
- Pick a Name for Your LLC
- The name must not already be on the Secretary of State’s records as being the name of another domestic or qualified LLC or other business.
- Make sure to do a trademark search to avoid intellectual property infringement.
- Choose a Registered Agent
- The registered agent is the one who receives legal notices and tax documents on behalf of the LLC.
- Some LLCs use the owner of the company as a registered agent.
- Prepare an LLC Operating Agreement
- An operating agreement is an agreement among the members, and between the LLC and the member/members, regarding how the LLC will be operated.
- Many states do this orally, but it is encouraged to have a written agreement as well.
- File the LLC with Your State
- LLC formation documents (Certificate of Organization, Certificate of Formation, or Articles of Organization) must be filed with the Secretary of State’s office.
- Each state requires different information for the LLC formation document, so make sure to check the requirements for your state.
- Obtain an EIN
- Now that the business has been established, you must apply to the IRS for an EIN (Employer Identification Number).
- This number will be used on the LLCs bank accounts, income, and employment tax filings.
Self-Incorporation is when a self-employed business owner sets their business up as a corporation for tax purposes. This makes the owner not personally responsible for business liabilities. While similar to an LLC, self-incorporation allows for shareholders and a board of directors. Here are the steps to follow to self-incorporate your business:
- Pick a Name for Your Corporation (just like LLC)
- Create Governing Documents
- Corporate bylaws are used internally as formal guidelines for how your corporation will handle all matters.
- File Paperwork
- The articles of incorporation can be found on most Secretary of State’s website with step-by-step instructions.
- Each state requires different information for the articles of incorporation, so make sure to check your state’s requirements.
- Once the filing is accepted, you will receive a certificate or receipt that confirms your business’s legal existence.
- Obtain an EIN (same as an LLC)
While the steps and some benefits may be similar, there are differences between an LLC and self-incorporation. An LLC can have unlimited owners or “members,” while a self-incorporated company can only have 100 shareholders. Self-incorporated companies are only taxed once, and only the shareholders pay on the profits received, while with an LLC, you can choose whether to be taxed once or twice. A board of directors is required for self-incorporation, while it is not required for an LLC.
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