How to Set-Up a Limited Liablity Company (LLC)

For a small solo-preneur business, operating as a sole proprietor is acceptable. It’s certainly easier since there is no paperwork and only requires a Schedule C for taxes. However, its also a riskier proposition. If sued, your personal assets (such as your house) are fair game.

In the 1970′s a new form of business structure called the Limited Liability Company (LLC) emerged that provided business owners with the protection and tax advantages not available to sole proprietorships, and yet are less complicated than corporations.

Because it is a legal entity, LLC’s should be set up by qualified professionals such as a lawyer or service that specializes in creating business entities. But it is possible to set up your own LLC.

Name your LLC making sure that the name is not in use or trademarked by another company. You can visit the US Patent and Trademark Office to do a name search. Contact your Secretary of State to see if the name is taken by another corporation, and check with your local area business office to find out if the name is being used in your area. You can use a non-trademarked name that is taken by another business if your business does not operate in the same area as the company already using the name. But you’re better off to choose something different and unique. Don’t forget to add LLC or limited liability company to your business name. To make it easier, you can use your given name. Unless your name is John Smith, odds are your name isn’t trademarked or in use by someone else.

Decide where to register your LLC business. Many people prefer to set up their LLC in Nevada or Delaware because they have liberal laws regarding corporations. If you go this route, you”l be setting up a foreign LLC (unless you live in Nevada or Delaware) and will need an address and an agent in that state. Most LLC services will provide this for you for a yearly fee. Or check with your state’s rules about setting up an LLC in your home state. You may find its just as easy and affordable.

File your Articles of Organization, which include the name of your company, its address and the purpose of the business. Some states may want a list of all the members of the business, as well as the registered agent of the company. In New York and Arizona you’ll need to put a notice in the local newspaper about your intention to form an LLC. You can find templates and forms online, in office stores or in books on LLCs. You may want to hire a lawyer to help you to make sure its done correctly.

Write and sign an operating agreement. The operating agreement gives the members’ interests in the business (percentage ownership), their rights and responsibilities and voting power, as well as how profits and losses are allocated, and how meetings are held. All of the business members should sign it. Some states may not require this, but it’s recommended to insure proper protection of the LLC.

Create a filing system to organize LLC documents and keep meeting notes, business changes and financial information. Even single person LLCs that don’t have meetings should keep accurate accounts of the money and business decisions.

Get needed business permits and licenses as required by your city or county. Also apply for an Employer Identification Number (EIN) which you’ll need for taxes. If you’re a single-person LLC you can operate under your Social Security number and file a Schedule C on your taxes, but then you’ll be missing out on some of the tax benefits that come with completely separating the business from you.

Open a business account at the bank. This should be in the LLC’s name and any money used from the account should be for business purposes only. Members can draw salaries from the LLC, but aren’t allowed to directly pay personal bills with LLC money.

Home Business Legalities: Permits, etc

In most cases, making your home business legal is a fairly easy process. Sometimes all you need is a license. Sometimes you don’t even need that. But before you hang up your home business shingle you need to check to make sure you have needed permits and meet other legal requirements.

Business Structure

Before you get your licenses, you will need to determine how you are going to structure your business. In a sole proprietorship, the business is just you. You retain all the glory and risk. It also means that your personal assets (home) can be at risk if you’re sued. Other options are partnerships, LLC’s and incorporating. These have advantages in that they limit your risk should the business fail or you get sued. They also have some tax advantages. But they require paperwork that should be created or at least reviewed by an attorney. You will also need to apply for an Employer Identification Number (EIN) as the business will be a separate entity and can’t use your social security for taxes.  Because I’m not an attorney or a tax advisor, I recommend talking to a lawyer or tax expert if you have questions about this.

Business License

In most areas you will need to get a business license or permit (although my county doesn’t have them). For small home based businesses this runs about $35 to $50 per year depending on how much money you make. You should check with your city or county business office to find out about fees in your area.

The application for a business permit is usually short and straightforward. Your locality will issue a business certificate or license that you are required to display. It’s very exciting to have a business license…it makes you feel legit! So frame it and display it in your office.
To find out about business licenses in your community, look in the local government pages of your phonebook usually under licenses and permits although this differs depending on how your phone book is indexed. There should be an entry indicating business licenses. If you can’t find a business-related number, try calling another local government office, the Chamber of Commerce or your local Small Business Administration.

Sales Tax Permits

If you are selling tangible goods and your state collects sales tax, you may also need a sales tax permit. The sales tax permit allows you to collect sales tax (and pay it to the state). It can also allow you to buy the wholesale items you resale or materials needed to create your product without paying sales tax. Contact your state’s sales tax office for information on applying for a permit. Its possible you can apply and file your monthly report online.

Property/Business Tax

If you’re state has personal property or business tax, you may need to register your business to pay tax on your business equipment.  Your local personal property tax office should be able to help you with this.

Fictitious Name Statement

If your business name is something other than your given name, you will likely need to fill out a fictitious name statement also known as DBA, Doing Business As. This statement is to notify the public that you are the person doing business under the business name. It is usually printed in the local paper. Your city or county business office should be able to tell you how this is done and may have the paperwork available.

Zoning
Did you know that it could be illegal to operate a business from your home? Many communities have laws against running a business in a residential area. These laws were usually developed to maintain the safety and aesthetics of the neighborhood. People didn’t want more traffic on the street, a chemical lab next door, and other potentially disruptive businesses ruining the neighborhood. Many communities have changed the laws or developed waivers that allow home-based businesses, but you should check with your community before beginning any home business. In most cases, if you don’t plan to see customers at home, offer toxic or dangerous products, or need a sign in your yard to advertise your business, your community will grant you the ability to start your own home business.

To check on the zoning laws in your neighborhood, check your phonebook’s local government pages. Usually there is a listing under the community government that says “Zoning”. Call the zoning office and let it know the type of business you are considering. Usually it will tell you on the phone if your business is okay and what you’d need to do if anything.

If you are renting your residence, check your rental agreement or lease for any restrictions on home businesses as well. The same is true of condominiums, co-ops and communities with home owners associations, which often have covenants and restrictions. If there is a restriction, but your business idea wouldn’t negatively impact the community contact your landlord or the homeowners association about getting permission to run your business from your home.

Additional Permits

You may need other permits or licenses depending on what you plan to offer. Therapists, contractors, and other types of industries require special licenses before you can open for business. Be sure to check on this before starting your business.