There are several considerations to consider before and during the initial phase of forming your Limited Liability Company (“LLC”). It is also crucial to note that a well-organized business plan before starting any business entity is probably the most pivotal step in the initial development of your company. Once your business plan is developed, you are ready to begin the process of legitimizing your LLC.
Starting and Organizing a Limited Liability Company (LLC)
Your first step is to determine which state you wish to set up your LLC. Often it is the state where your principal place of business will be located or where you will be conducting most of your business transactions. It is important to note that if you file in one state and operate in another that you will often need to register the LLC as a Foreign Limited Liability Company in the state where you are using it. You also need to secure a Registered Agent in that state, as a physical location is necessary to serve the process (a P.O. Box is not legally sufficient in most cases). Once this location is selected, you will file your Articles of Organization with the appropriate division of that state’s Secretary of State. For example, in Virginia, the Articles of Organization are filed with the Commonwealth of Virginia’s State Corporation Commission.
The Articles of Organization (“Articles”) is a document that outlines the purpose and structure of the LLC, similar to the Articles of Incorporation filed for a Corporation’s Bylaws. However, the LLC is a creature of state statute and the requirements for filing, including initial fees payable to that state’s respective agency, vary from state to state. Therefore, it is imperative to consult a skilled business attorney, preferably one also knowledgeable in intellectual property law, who can assist you with these filing requirements as well as assist with a general business name search and trademark search which can help ensure that: (1) your business name is not already in use and (2) you are not infringing upon another business entity’s Trademark. It is important to note that when filing your Articles with a state agency, they often accept your LLC’s name as you label it so long as there is not another entity with the same name filed in that state and that it is not grossly obscene. However, this acceptance is not federal and may lead to future federal Trademark Infringement claims.
Operating Agreement: Internal, Governing Document of an LLC
The appropriate state agency has approved the next step after your Articles is to have a skilled business attorney draft an Operating Agreement on the LLC’s behalf. An Operating Agreement, akin to a Corporation’s, is an internal document, a copy to be kept at the LLC’s principal place of business, of the LLC that describes in detail such consideration as the structure and governance of the company, how the company is operated, member disputes, dissolution procedures, voting percentages in the form of membership interest or units, and distributions (similar to a Corporation’s dividends). If no Operating Agreement is drafted, then any dispute, for example, between an LLC’s members, is governed by default to the appropriate state’s Limited Liability Company Act and respective case law.
Federal and State Tax Considerations of an LLC
After your Operating Agreement has been drafted, approved, and signed by the LLC’s members, it is vital to register for an Employer Identification Number (EIN), also known as a Federal Tax Identification Number, with the Internal Revenue Service. A skilled business attorney, or tax attorney, can file an EIN on your LLC’s behalf by having you sign a Form SS-4 authorizing the attorney as a Third Party Designee to act on your behalf. The EIN will not only be used for tax purposes but also to open bank accounts in the LLC’s name and for employee tax withholdings.
It is important to note that during the setup of an EIN, an LLC is permitted to choose what type of tax structure it would like, dependent upon the number of and combination of its members. For example, suppose the business entity is a single-member LLC. You may choose to use the tax structure of a sole proprietor, whereby you would report the LLC’s tax considerations on your basic income tax form. If you have two or more members, you have the option of being taxed as a partnership or as a corporation. There are some advantages to each tax structure, and it is recommended that you consult an attorney, accountant, or tax expert to make sure that you are receiving the benefit that fits the company’s needs and your own. It is also important to note that you should register your organization with the Virginia Department of Taxation if your Articles were filed in the Commonwealth of Virginia.
Virginia Limited Liability Company (Virginia LLC)
Deriving its authority from state statutes, the LLC is a fairly customizable business entity, moldable to the needs of the business and its members. In the Commonwealth of Virginia, a Limited Liability Company is organized under Virginia Statutes §13.1-1000 et seq. (the “Virginia Limited Liability Company Act”).