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Congratulations, you’ve decided to start a business!
No matter where you start your business, one of the most important actions you can take is to set up an LLC for your business. There are plenty of business entities, but for online businesses, the simplest is an LLC — there are different types of LLCs to choose from, but we’ll get to that later. Setting up an LLC can help to protect your personal assets, making it the ideal structure no matter if you’re a one-person shop or are in a business partnership.
Forming an LLC can be fairly straightforward, but you’ll need to follow the specific requirements from your state. What we’re going to show you is the basics of setting one up — these steps are generally the same across the U.S. Depending on your state, setting one up can take as little as a few hours.
1. Decide on Your Tax Structure
There are a few different types of LLCs, the most common being a single-member LLC and what is commonly known as an S-corporation (or S Corp). Fun fact- an S Corp isn’t actually a business structure, but rather an LLC that’s asked the IRS to tax it like an S Corp (more on that below).
Technically, the IRS doesn’t see an LLC as a taxable entity (don’t worry, you still get all the legal benefits under your state laws). That means if you decide to become a single-member LLC, you’ll be taxed as a sole proprietor. You’ll need to file taxes based on your Schedule C, which will be a part of your personal tax return, since all of your business’ profits count as your personal income. And you’ll pay self-employment tax on your business profits.
However, you can ask the IRS to tax your LLC as an S Corp. As an S Corp, you’re required to pay yourself a salary, which will be counted as a business expense. Then, you’ll report the salary and the profits of your S Corp on your personal tax return.
So what’s different from a tax perspective? Well, you only pay self-employment tax (which includes Social Security and Medicare) on your salary. Your S Corp profits aren’t subject to self-employment tax, only income tax. That’s where the potential tax savings come in.
Generally, if you anticipate (or are already) earning at least $80,000 in annual profit, then an S Corp is worth considering. For those who aren’t or who are unsure what their income will be, a single-member LLC is a great choice. Besides, you can always change to an S Corp down the line.
Keep in mind that if you decide to form an S Corp, there are more formalities like paying yourself regular payroll and filing additional tax returns. Of course, single-member LLCs also have formalities, but it’s less.
Deciding what tax structure to choose can feel a little confusing, so if you’re not sure how to proceed, it’s best to seek the advice of a trusted tax professional to guide you through your individual situation.
2. Decide on Your Business Name
Choosing a business name isn’t that difficult, but you’ll want to make sure it complies with state rules. For instance, make sure you don’t choose a name that someone else is already using. Some states may also have a list of prohibited words.
3. Get an LLC Article of Organization Form For your State
An article of organization is a document that includes basic information about your LLC and establishes it as a separate legal entity. Information you’ll need to provide includes:
- Name of your business,
- Where it’s located
- Business owner’s name
- Registered agent’s name and address. A registered agent is a person that’s been appointed to receive documents on behalf of the business (this person can be you).
To get this form, head to your state’s Secretary of State official website. Before filing this document, make sure you find out if there are any specific requirements regarding business names and whether your state or county requires you to put a notice in the paper. As it stands, some counties in Arizona, Nebraska, and New York have this requirement.
4. Fill out the Articles of Organization Form
All states typically require the same amount of information — your business name, its purpose, the registered agent, main office address and names of initial members. At this point, if there’s more than one business partner (or member), you don’t need to specify owner distributions, just their names.
5. Publish a Notice in the Newspaper
Remember, not all states have this requirement, so you’ll want to check with the Secretary of State where you reside to make sure. For those who do require one, rules may differ county to county. In most cases, you’ll need to find an “approved” newspaper and publish a notice stating your intention to form an LLC. Some states even specify how long this notice needs to be in your local paper.
6. Submit Your Articles of Organization
After checking it over carefully, it’s time to submit your articles of organization with the required filing fee. Some states may require an annual corporate tax, which is separate that’s due when you file the document to set up your LLC. For instance, California requires you to pay an $800 annual tax.
Thanks to Collective, I don’t have to worry about bookkeeping, taxes and other government related tasks and can focus 100% on my work. If you’re self-employed and need help with tax, bookkeeping and ongoing support, all-in-one place, you’ll love Collective!
Arjun Dev Arora
Strategy, Venture, Technology
7. Create Your LLC Operating Agreement
An LLC operating agreement outlines the management and financial rights of all LLC members. This includes who contributes money if the business needs more, how and when profits are distributed and how members can leave the LLC. The important thing to remember is that your operating agreement should outline everything you believe is crucial so that there’s no questions left unanswered about the nature of your LLC.
If you have a business partner, it’s a good idea to work out all the kinks of the operating agreement well in advance of filing the articles of organization for your LLC. You can save everyone both time and hassle if you and your potential business partners can’t get on the same page about the day-to-day operations.
Even if you’re a single-member LLC, it’s not a bad idea to get everything in writing. That way, if for some reason you’re not capable of managing the business’ affairs (like if you end up in a debilitating accident), you can designate who can take over and help.
Some states don’t require an operating agreement, so if you’re the sole owner, you can consider creating one after you file your articles of organization.
If you’re overwhelmed by the idea of creating your own operating agreement, check out our free template here.
8. Learn How To Keep your LLC Active
Once you’ve formed your LLC, it’s important to learn how to keep your business license active — your state’s Secretary of State will have the specific information you need. In most cases, you’ll need an annual filing fee. Fees will depend on your state and type of LLC and, of course, you’ll have to comply with tax laws, again depending on the structure of your LLC.
Other Considerations When Setting Up an LLC For Your Online Business
When setting up your new business, you’ll want to consider the following:
- Doing it yourself or hiring a professional: In most cases, you can set up an LLC by yourself. There are also lots of sample articles of organization you can look at in order to create your own. However, if you’re planning to start an S Corp, hiring a professional like an attorney or Collective will ensure that you file all the right paperwork.
- Getting an EIN: An employer identification number, or EIN is what you can use to complete your business taxes instead of using your Social Security number. Although it’s recommended, it’s not required of single-member LLCs. Some banks may require you to get one to open a business bank account or when applying for a business loan. Applying for one can be done through the IRS website.
- Choosing your next steps: It’s important that your business finances are well-organized. Once you have your LLC, your next steps should be to open a business bank account. Other considerations include taking out a business insurance policy, choosing accounting software and getting a business credit card.
That’s it! It may seem like the process to set up an LLC is complicated, it’s fairly straightforward. There’s always the option of hiring an experienced professional for assistance.