Considerations when forming a limited liability company
What is a limited liability company?
A limited liability company (“LLC”) is a type of legal entity, formed through registration with the Washington Secretary of State, through which you do business. LLCs limit the members’ liability without the formalities of a corporation, assuming you respect the corporate form (more on that later). In this regard, it protects the members from individual liability if you meet all the requirements. You can do any type of business through an LLC basically.
What are the benefits?
In addition to limiting your personal liability and protecting your assets, LLCs are easy to run and cost-effective, especially for smaller companies. You also have a wide variety of tax possibilities (such as pass through taxation - see below). First, you need to talk to your tax advisor or accountant on this issue. You can be taxed as a disregarded entity, a corporation (e.g., “S-Corp.”), or as a partnership. Under 2018 tax laws, disregarded entities may not be able to elect out of the IRS’s audit regime. In certain circumstances, you can pass through the income on to your personal income, thereby you are taxed only once.
What do I need to do to set it up?
Name. You need to get a name that is distinguishable from other existing business entities. You can search for name availability through the Washington Secretary of State’s website.
Principal place of business. You need to have some physical location where you will conduct business. This can be a lawyer’s office or your business’s physical location, depending on the nature of your business.
Certificate of formation. Once you get a name, then you prepare the initial report and apply for a certificate of formation. We do this online, and you get pretty fast results. The filing fee is around $200.00.
Registered agent. A registered agent is the individual listed on the formation documents and with the Secretary of State who is authorized to receive notices, correspondence from regulatory bodies, and is the individual or entity who is served with legal papers if you ever get sued. You want a registered agent other than yourself. You don’t want to get served. It’s never fun. We serve as registered agent for many LLCs and companies.
Operating Agreement. You then need to have a lawyer draft up an operating agreement. This sets forth very important information including: principal place of business, the names of the members, transfer restrictions (e.g., no member can sell their shares for three years), how profits and losses will be distributed or allocated, capital contribution requirements, initial capital contributions of the members, percentages owned by members, dispute resolution clauses for disputes between members, and other information.
Comply with other tax and regulatory obligations. Once you get your certificate of formation and have filed your initial report with the Secretary of State, then you will need to apply for a business license with the Washington Department of Revenue. The fees range from $100.00 to thousands, depending on the business. A general business license is cheap; liquor licenses and brewery licenses are very expensive. Then you also need to obtain an employment identification number (tax id) from the Internal Revenue Service, which can be done online and obtained immediately. You’ll need to know at this point how you’ll be taxed.
Renewals, meetings, and annual reports. The more complex your business the more member meetings you will have. You will want to keep meeting minutes and make records of all member resolutions regarding major activities, such as obtaining financing, acquiring another business, or authorizing new member shares. Then you’ll need to file an annual report each year with the Secretary of State in order to keep your LLC in good standing.
Taxes. No business is a business without taxes. Depending on what business you’re in and what your accountant says, you’ll typically have to pay excise taxes at the end of every quarter based upon your revenue for the previous quarter. Welcome to capitalism!
It’s a lot. Hire a lawyer.
If you’ve made it this far, then you’re serious about starting a business and forming a business. Many folks try to do it themselves. This can be done, but it’s hazardous and important matters are left unconsidered and can lead to awful consequences. Partnerships go awry or member die or get divorced. You need important provisions in your operating agreement to cover all of these events.
We can help.
The Mayo Law Group PLLC has extensive experience in forming LLCs and ensuring legal compliance throughout the duration of your entity. Schedule a call today for your free consultation. In the meantime, you can download our LLC Formation Questionnaire to start filling out to get started right away! We look forward to hearing from you!