What Is An LLC?
Short for “Limited Liability Company,” an LLC is a business entity with characteristics of corporations, partnerships, and sole proprietorships. An LLC protects its owners from potential liability incurred in the company’s name.
Why Are They Important?
As a small business owner, your personal assets are often tied to your business assets, which leaves them vulnerable to the company’s liabilities and debts. An LLC provides protection from those liabilities. With an LLC, your home, savings, and other personal property cannot be seized by creditors going after your business. Forming an LLC also confers many tax and legal benefits. One of the biggest advantages of forming an LLC is flexibility in taxation. For example, you can decide whether you want to file as a “disregarded entity” or receive corporate taxation. If you file as a “disregarded entity,” any business revenue will be “passed through” to the owners and taxed as personal income. If you choose the corporate route, the LLC will be taxed at a lower rate for the first $75,000 of income. There are pros and cons to both treatments, depending on your business’s revenue stream. In addition to these benefits and protections, LLCs lend credibility to a business that can provide reassurance to customers and potential partners.
How To Form An LLC
The Illinois Secretary of State provides a guide (found here) to help you start forming your LLC. Here’s are the basic steps:
- Choose a name for your business containing the abbreviated or expanded form of “LLC”. See the guide to ensure the name of your business conforms with the rules.
- Nominate a registered agent. A registered agent is a person or business who will receive and send legal papers on behalf of your business.
- File your articles of organization. You can do this either by mail or in person.
- Prepare an operating agreement to profile the structure and procedures of your LLC. This is not required in Illinois, but is highly encouraged. Operating agreements are discussed in more detail below.
- Obtain an EIN or Employer Identification Number. You will use this number when you file state and federal taxes.
After these initial formation steps, it’s a good idea to separate personal and LLC assets with a business bank account. You should then register your LLC (using your EIN) for Illinois state taxes. This is especially important if you have employees. Finally, take time to organize your finances, obtain necessary permits, licenses, and insurance, and familiarize yourself with hiring procedures.
It’s best to start any business with clear standards and guidelines to set expectations, responsibilities, and procedures should a problem or dispute arise. When starting a small business, it can be difficult to envision potential conflicts or allocate equity so early in the process. However, you will eventually have to address these issues and an operating agreement is the simplest solution. They are also important when designating managers and responsibilities among the members.
Here are some key elements to include in your operating agreement:
- Management: The operating agreement should set forth how the LLC is managed. An LLC can be managed by one or more members. In general, an LLC’s management is responsible for the business’s decision-making, whether day-to-day or strategic and big-picture. The management provision specifies the powers allocated to managers, procedures for removing or replacing managers, and any limitations in managers’ authority, among other things.
- Conflict resolution: Outline a clear and efficient method of dispute resolution to avoid the messiness of informal solutions and the cost of civil litigation.
- Equity: Designate a quantifiable amount of membership to each member, which determines their current and future equity. It is also advisable to create transfer restrictions, which prevents a member from selling their equity to third parties without discussing the sale with the others.
- Capital contributions: Capital contributions are money or assets given to a business as an investment. Capital is the lifeblood of a new business, and it’s crucial to create a framework that decides the frequency, nature (mandatory or voluntary), and process for capital contributions.
Wanting to form an LLC? Wondering if this is the right structure for your business? G & G Law can help! Contact us today.