Let’s start with the history of LLCs.
Before the 1970s, the laws in the United States were different from what they are today.
The only way for a person to separate their personal property (house, cars, boats, etc.) from their business was by registering a corporation.
But what was the problem with this?
The problem was that in case of a lawsuit, if you lost and didn’t have a registered corporation, you put your entire personal property at risk.
The solution may seem simple: register a corporation to prevent this from happening. But it wasn’t that straightforward.
To register a corporation, you had to meet many requirements, and as many of these businesses were sole proprietors, they couldn’t comply with everything they were asked for.
So, they had only two options:
- Pay higher taxes to protect their personal property.
- Pay lower taxes but put their personal property at risk.
All of this sounds like a nightmare, and entrepreneurs lived with headaches due to these complications.
That’s why, starting in 1977, states began allowing LLCs, the solution that put an end to many headaches.
Let me tell you more about what it is, how you can create it, what the process is, etc.
What Is an LLC?
It stands for Limited Liability Company, and it is a legally recognized business entity in the state.
When a person registers an LLC, that company becomes subject to the laws of the state where it was registered.
This means that if this LLC were to encounter any issues in the future, such as a lawsuit, a judge would have to adjudicate it based on the laws of that state.
The purpose of this structure is to establish a legal separation between the registered company and the owner.
This way, if the company is sued and loses that lawsuit, only that company would be at risk.
How Does an LLC Work?
This structure can have a single member or several members. In the case of a single member, it’s known as a “Single Member LLC,” and when there are multiple individuals, it’s referred to as a “Multi-member LLC.”
You should keep in mind that even if you are a single member or have very few members, you should treat the Limited Liability Company as a business.
By this, we mean that you must have a business bank account, and all activities related to the LLC’s commercial operations should be managed through that account.
Also, be aware of these two aspects of how it operates:
- When we make an agreement, sign a contract, or engage in a commercial transaction, it’s important that these documents are in the name of the LLC, not in our personal name. Why? Because if we sign a contract in our own name, we become responsible for that commercial transaction or contract. If something goes wrong, we are at risk along with our personal property.
- When we register an LLC and establish a deal or a business relationship, we should understand that if an accident occurs, causing damage to structures or personnel, it would be the responsibility of the company.
6 Steps to Create an LLC in the United States
1. Choose the State
Determine in which of the 50 states in the country you will register your brand.
Remember that the laws vary depending on the state in which your Limited Liability Company is registered.
Many prefer to open an LLC in Delaware, others in Florida, Texas, Wyoming, California, etc.
But this decision really depends on the research you do to determine which of the 50 states best suits your company’s needs.
2. Determine the Owners of the Company
Select who will be the owners of the company, the role each will play, and the percentage that each owner will be entitled to.
3. Choose the Company Name
You decide the name, as long as it’s not a name that’s already registered and complies with your state’s LLC name rules.
4. Create an Operating Agreement
An operating agreement describes all the functions of an LLC and its process for making financial decisions.
Not all states require an operating agreement, but I recommend that you create one anyway. The agreement governs internal operations so that they make sense for the company owner and others involved.
5. Apply for an EIN from the IRS
An EIN (Employer Identification Number) is required for the LLC to operate, and you can request it through the online Form SS-4.
6. Don’t Forget Your Annual Obligations
Such as filing taxes and submitting the LLC’s annual report to the Secretary of State.
Advantages of an LLC
1. Its Flexibility
LLCs have no restrictions on the number of members allowed, and it’s not necessary to be a resident (possess a Green Card) or a U.S. citizen.
The operating agreement will determine how the company will be managed.
2. Very Low Taxes
LLCs enjoy a single level of taxation (pass-through taxation), where members report and pay their share of LLC’s profits and losses on their individual tax returns.
In other words, no taxes are paid at the company level.
However, the LLC must file an annual tax return.
The liability of LLC members is generally limited to the assets each member has invested.
LLCs can be managed directly by their members (Member-Managed) or by Managers (Manager-Managed). These individuals will have the authority to manage the day-to-day operations of the company.
5. Tax Exemption for Foreigners
Foreign owners of an LLC may be exempt from paying taxes in the USA.
In case the LLC (i) has no business activities in the USA (having a bank account is not considered an activity) and (ii) none of its partners (members) is a US tax resident, the LLC and its members may be exempt from US taxes.
Need Help Starting Your LLC in the United States?
At Rex Legal, we assist you in creating your company in the United States from the comfort of your home.
If you feel lost in the process and prefer to leave it in the hands of professionals with years of experience in creating companies, then it’s time to contact us and fulfill your dreams as an entrepreneur.
Contact us here.