How to form an LLC in the United States
1. Overview on having an LLC
2. How to choose between forming an LLC or INC
3. What state to choose for your LLC
4. How to form an LLC
1.Overview on having an LLC
One of the steps that you will have to consider when you want to
earn some money is the legal aspect of the matter. In order to have
a trustworthy business that tells your clients you run a professional,
serious business, you have to consider giving your venture a legal
structure. Having a legal structure makes potential customers feel
more secure when they work with you. It makes them feel that you
will not just disappear after they've paid their one year subscription
to your service for example.
Depending on the type of business you want to run, LLC or INC, you can be protected as individual in case of bankruptcy or suits. But I will talk more about this later in the article. Another aspect is that, whether you like it or not, taxes should be paid and records of your business should be kept if you want to stay out of trouble. If they provide access to the Internet from jail and you think it is worth taking the chances then stop reading. :)
2. How to choose between forming an LLC or INC
Forming an LLC or INC is something that you have to face from an early point. Which one to choose? What would be the advantages for an LLC? What would work better?
The final decision is something that you have to reach on your own, but before doing that you should know as much as possible about both options. Let's start with some short descriptions.
C-Corporation: This is a for-profit corporation that offers its shareholders protection for their assets as long as they follow the formalities imposed by the state in which the incorporation takes place (holding meetings and issuing stocks are the more common ones). When taxes are collected, a corporation is treated as a separate entity and it fills its own corporate tax forms.
Because it is a separate entity, the corporation pays income taxes. In addition to that, when dividends are paid, the state levies taxes once again. To avoid this process of double taxation the owners (shareholders) can choose to refrain from paying dividends. If they work for the corporation they can pay themselves salaries and fringe benefits that are deductible to the corporation.
A corporation can have one or more owners/shareholders and it must have a Board of Directors and Corporate Officers. The Board of Directors is in charge of the management of the corporation while the Corporate Officers make sure that all the other processes in the corporation are properly done. Corporations can exist indefinitely, even if shareholders die or shares are transferred.
S-Corporation: It is a C-Corporation that, after the corporation has been formed, selects the "S Corporation Status" by submitting the 2553 form to the IRS (Internal Revenue Service). After this, the corporation is taxed as a sole-proprietorship or partnership and thus loses the separate entity status. The income is divided among the shareholders and each one of them is taxed individually. This means that the shareholders will support both the income or loss that comes from the S-Corporation.
Note: Please consult an accountant or C.P.A. who knows the federal and local tax rules and with whom you can discuss more details of your business. Only that way you can make the best decision for you and know whether it is an C-Corporation or an S-Corporation that suits your situation best.
LLC: An LLC is a very common form of incorporation these days. When it comes to sharing the income between owners an LLC is being treated as a partnership, but it still maintains the limited liability veil given by corporations.
In case the company is sued or other problems occur, only the LLC is held responsible. This situation applies to the vast majority of cases, but depending on the specific situation, things can vary. As stated, in almost all cases, the LLC will act as a separate entity and its members will not be held responsible.
Another advantage is that in most states an LLC requires less paperwork done in comparison to a corporation and that can cut down the costs too, this being noticed especially in the beginning.
An LLC has two or more members, nowadays many states beginning to accept LLCs formed by only one member. You should keep in mind that, in some situations, the IRS may treat differently an LLC formed by one member than one that has two or more members based on some not very well known criteria.
The duration of existence of an LLC, unlike the existence of a corporation,
has to be stated in the moment of formation. The duration may be
a certain period of time or the activity is considered over when
the death, resignation, withdrawal of a member occurs. Of course
bankrupcy is another moment when the LLC's activity is considered
to be over (unless the continuation of the LLC is voted by a majority
in both the profits and capital interests, in maximum 90 days).
Because LLC is a simpler and more popular form of incorporation these days among business owners, I will continue to refer only to it. However, no matter what structure you decide to give to your business, the information provided in this article will continue to be useful.
Disclaimer: Do not use this information as a legal advice. For a legal advice or other expert assistance please contact an accountant or an attorney.
3. What state to choose for your LLC
Just like the previous step, there are several other options a person should choose from before starting the whole process. For US citizens, deciding between forming an LLC in the state where they reside or another state, can be just as difficult as it is for a foreigner to decide whether to form a LLC in the United States or not.
Nowadays forming an LLC or INC in Nevada, Delaware or Florida is a very common thing, and people tend to go there for various reasons among them being the following:
- Nevada: no corporate income tax, no taxes on corporate shares, no
personal income tax, there are nominal annual fees and there is
no franchise tax. You are also offered a very good protection/privacy
for the identities and assets of all the officers of the corporation.
- Delaware: Corporations don't have to pay state corporate
income tax, there is no personal income tax and there is a nominal
- Florida: no personal income tax, no corporate franchise
tax on capital stock and no corporate income tax on subchapter S-Corporations.
American or not, there is always the possibility of forming an LLC in any other state in the US. According to what you intend to do, the better and profitable solution might differ, but it is worth to note that incorporating in Nevada, Delaware or Florida is what many people choose, having the advantages stated above. For complete legal advice I guide you again to an accountant or an attorney.
If you are an American you might confront with the decision of whether or not you should form an LLC in the state where you live in. If your business is "making business" in your state but you incorporate in some other state, you might have to pay income taxes anyway for the portion of business that is being performed in-state and on top of it all you would probably have to register in your state too. So this decision should be based on the type of activity you want to perform in your business and after you make an inquiry at your state's authorities.
If you are a foreigner, you must also consider the fact that you should have a Registered Agent in the state where you incorporate.
4. How to form an LLC
To solve this matter you have again two options: do all the paperwork yourself or hire a firm to help you deal with it. Dealing with the whole process by yourself might lead to a lower monetary cost in the end, but a higher cost in terms of time. If that is what you decide to do, then you will have to check with the Department of State in the state where you want to form an LLC.
Many states have all the necessary forms on-line. You can also go to an office in case you need further assistance. After you file all the required forms, pay the state fees and your LLC is registered, you will need to obtain the EIN (Employer Identification Number) for your business. You can find all you need about it by going to this page.
For most foreigners, letting a firm help them form an LLC has proved
to be the better solution because they can't go to a local office
in the US whenever a problem occurs, regular mail delivery can be
slow or can get lost while faster and more secure postal services
are significantly more expensive. Whether or not you are an American
or a foreigner, if you want to save yourself quite some time and
don't want to deal with the stress of doing something wrong, there
are firms that can do the job for you.
After searching and looking through articles and people's reviews,
I have picked up several firms that have proved to have satisfied
All of them can help you in forming an LLC in any state from the USA, they obtain the EIN for your business and also make a seal for it. They also have a Corporate Kit, its content varying a little from firm to firm. They offer their services to both Americans and foreigners. For foreigners, the price will appear to be a little higher than it is for Americans because it includes higher shipping fees and the Registered Agent. This Registered Agent is a person or an entity that will receive all the tax and legal documents for your company. All these documents can later on be shipped to you.
The companies above might have a mail forwarding program, but if it doesn't suit you or you don't want put all your eggs in one basket so to speak, you can always check other services that are specialised in forwarding mail service, some like www.mailforwarding.biz and www.myus.com.
If after you checked with all those firms, you didn't find one to satisfy your needs in forming an LLC or INC, feel free to perform another search on your own. Just watch out for anything that seems suspicious and always look up for reviews. You want to be a satisfied customer so you should go with companies with happy customers. That was something I based my search on as well.
There is one more aspect that foreigners should consider. It is very hard, if not impossible, for them to create a bank account in the US. It didn't use to be like this, but nowadays the banks are forced to apply this rule of "knowing" their customers and thus they invite those who want to open an account for their business to visit one of their branches.
That being said, please make sure you think of every aspect of your business
before you take any steps. After you have virtually solved them,
proceed with confidence.
If you want to find more official things regarding taxes visit IRS, but for general information about incorporating you should will find SBA and SCORE to be helpful.
I wish you best of luck in this exciting venture you are about to begin! I hope what you read on this page provided some help and clarified some of the questions that you had before visiting it. May all your decisions that you are about to take be wise and successful!
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