10 Things to Consider Before Forming an LLC for Your Business Success

Introduction to Formation

When planning to start a new business it can be a very exciting time. However, there are many considerations you must account for to ensure your business is following all required guidelines and is set up for success. With this being such a busy time, there are many questions that can possibly be overlooked while going through the process of forming a new LLC.

Forming an LLC can also enhance your business's credibility compared to operating as a sole proprietorship or general partnership, making your company appear more professional to clients, partners, and lenders.

This guide will cover the 10 most important things to consider before you form an LLC and discus why these aspects are so important for new business owners.

Choosing a Business Name

The first thing customers will see when dealing with your business will be your business name. Your name should relate to your business services to give potential customers insight into what you do, and this will also help them to remember you better when searching for services in your industry. Choosing a name for your LLC must meet your state's legal requirements, and the name must be distinguishable from other registered business names in your state. You can check the availability of your desired LLC name through your state's business name search tool. If you're not ready to file your LLC formation documents, you can reserve your LLC name by filing with your secretary of state's office. LLC laws and requirements for naming can vary by state, so be sure to review your state's specific rules. Before registering your business entity, you will need to do a business name search in your state to ensure there are no conflicts. In most states, each business registered must have a unique name to avoid any confusion for customers and deceptive marketing tactics.

A good business name will be catchy, easy to remember, and relate to your business services. The combination of these features for your business name will help customers remember it and be more likely to be repeat customers. Using locally inspired names can work, but this also will limit your business if you ever try to expand as it would be confusing to customers. Keep these aspects in mind when you go to register your business, and do thorough research before submitting the name to avoid any rejections or long wait times.

What State to File Your Articles of Organization In

To be sure you are following all required guidelines for your business entity, you will need to correctly register your business with the corresponding state you will be conducting business in. The state you will need to register your business in will need to be the state you will be doing business in regularly and most consistently. If you have a physical address registered with the state of Alabama, for example, and operate your business from there, you will need to register your business with Alabama’s Secretary of State.

Formation fees, annual report fees, taxation, and LLC laws can vary significantly from state to state. Many entrepreneurs prefer to form their LLC in their home state to avoid additional compliance obligations.

Foreign LLC qualifications are a little more complex, but can be simplified by thinking of it another way. If you are going to be engaging in long term, sustained business activities, or in long lasting contracts across state lines you will most likely need to register your business in another state as well by registering a Foreign LLC. However, this will likely be something that will not affect your business until later in the lifespan. For most cases, it makes the most sense to register your business entity with your home state first and if you expand across state lines later then register a Foreign LLC.

Business Structure

Determining the correct business structure that best fits your needs will give you the best chance at success for your business entity. This will determine whether you need to file an articles of organization (LLC) or articles of incorporation (Corp). Depending on your business needs and how you would like your business set up will determine your business structure. Typically for a small business owner, it will be the easiest to register and maintain a limited liability company. These business types will usually have less regulations on them and more flexible ownership and tax regulations.

An LLC is a legal entity that combines the liability protection of a corporation with the tax flexibility of a partnership. LLCs can also be structured as a limited liability partnership, which defines ownership shares and management roles among members. One of the key advantages of an LLC is its flexible management structure, allowing owners to choose between managing the business themselves or appointing managers.

Forming an LLC gives you much more flexibility in expansion of your business, taxes, and how you are governed. These businesses can be either single or multi member LLCs, which is a great advantage for solo business owners. You can also add on as many members as you need throughout your growth or as you gain more partners and investors.

Liability Protection

When you register your business entity with the state, a huge advantage of this will be the limited liability protection that is given to these business owners. LLCs provide personal liability protection, meaning owners are generally not held personally responsible for business debts or legal judgments. The owners of an LLC, or sometimes referred to as members, are typically not personally responsible for business debts or legal judgments. This structure ensures that the owner's personal assets are generally protected from business debts and legal liabilities, as LLCs are designed to shield personal assets from business liabilities.

To continue these protections, your business will need to ensure there are a few guidelines that are followed. First, the separation of personal and business finances. Typically, this is easily done by starting a business bank account that is only used for business expenses. You will also need to ensure your business maintains good standing with the state you are registered in, which will continue your protections that are given to you by the business entity. Staying compliant will keep your business active, which is required to have these protections in place.

The liability protections you have through the registration of a formal business entity are a great shield to have in case of any lawsuits or outstanding business debts, but these are not absolute. There are instances where a court or judge can “pierce” the corporate veil and the liability protections will no longer be in place. Things such as fraud, not being in good standing, or mixing your personal and business finances are all things that will pierce the corporate veil and you will be accountable for these lawsuits or debts.

Filing Fees

Starting a business will come with fees you will need to pay for the registration and other requirements that will be needed from your business. LLC filing can be completed through online service providers, which can simplify the process for new business owners. Each state will have varying fees you will need to pay, and depending on your business structure these fees will change as well. Be sure to do research before officially registering your business so you are aware of the required fees.

Define Your Target Market

One thing that will be very useful for you and your business will be to start defining your target market to know who is going to be most likely to purchase your products or services, and who you will be focusing on the heaviest. Once you have defined your target market, your business will be able to focus funds on the most important demographic of customers who are your most likely customers and how you can be better positioned to meet their needs. This is not set in stone, you are free to change your target market based on industry changes, new products, or new business goals.

Most of the time these target markets are pretty obvious, especially if you are a niche business service or sell a specific product. However, other times these target markets might take some time to figure out to ensure you are making the correct choice. You don't need to have your mind made up right away, but it's important to have an idea so you aren't forming your business and trying to target everyone as this can lead to high marketing budgets and unattainable goals.

Separation of Your Personal and Business Finances

Whether you choose to form an LLC or a Corporation, a main advantage of forming an official business entity is the liability protection that is granted to you as a business owner. This protects your personal assets such as your savings and your home in the case of your business having any lawsuits brought against them or if your business incurs any significant debt. It creates the separation you need between yourself and the business, but there are certain regulations you must adhere to in order to maintain this separation.

Opening a separate business account and obtaining a business credit card are essential steps to keep your personal finances and business finances distinct. While federal law does not require LLC owners to open a separate bank account, it is highly recommended for legal protection, financial organization, and compliance.

For a more in depth guide on this topic, see our full guide here. But, to keep things short you will need to ensure your business stays compliant with all state guidelines and maintains good standing. Also, any sort of fraud or use of business finances for personal use can pierce this protection which makes having separate bank accounts so important. An Employer Identification Number (EIN) is often required to open a business bank account for an LLC. Having a separate bank account and business credit card helps maintain clear records, simplifies tax preparation, and protects your personal finances.

Ownership

Now, if you are going to be a solo owner of your business you won’t spend much time thinking about this step just yet. But, for businesses that are being formed by more than one person this is a crucial step to set up guidelines for ownership percentages, voting rights, exit strategies for owners, and much more. LLCs can be either member-managed, where all owners participate in running the business, or manager-managed, where appointed managers handle day-to-day operations, providing flexibility in how the business is run. Unlike a corporation, an LLC does not have shares, but ownership percentages can be defined in an operating agreement. Having these agreed upon by all members before getting busy with the actual business operations can make for a more seamless transition for members and the business itself.

One thing that is not required, but highly recommended, is to draft an operating agreement. This will be signed by all members of the business and sets the different aspects of ownership into writing so there is no confusion among members when there is a dispute or a significant business opportunity that is being voted on. LLCs also benefit from pass through taxation, meaning profits and losses pass through to the owners' personal tax returns, avoiding the double taxation that Corporations have to deal with.

If you have chosen to have Firstep form your business for you, we offer to draft an operating agreement for you so you have one from the start. This will help to set you up with guidelines already in place to be able to navigate the stresses of what happens if a member wants out of the business, if there is a disagreement in what path to take, and what voting percentages each member has.

Operational Complexity

When you are starting a business, you’ll need to factor in different operational aspects that can sometimes be overlooked. Obtaining a business license is often required to operate legally, and requirements can vary significantly by location. Ask yourself questions like are you going to need to hire staff? Do you need to keep a certain amount of inventory on hand? Does your industry require certain licenses to conduct business legally? Additionally, LLCs must pay taxes and comply with state laws regarding business licenses and permits.

These types of questions help form a sort of check list that you will need to conduct your business and ensure you are doing so legally and efficiently. If you do plan on hiring staff, your business will need to obtain an EIN to do this. These are issued by the IRS and will require certain personal information to be submitted on behalf of the owner of the business for approval. Most states also require annual reports and franchise tax fees for ongoing maintenance of an LLC.

Registered Agent's and Their Role

Regardless of the state of formation your business will be required to maintain a current and updated registered agent. This will be the person who is responsible for collecting and receiving important notices from the Secretary of State or any legal notices and service of process that is sent to your business. Your registered agent can be either you, a trusted friend or family member, or a registered agent service. A registered agent is beneficial to business owners who do not want to be responsible for handling these sensitive documents, and you also must be at your listed address during regular business hours (9am-5pm M-F) to be available to receive these documents.

If you have a high amount of business expenses already, hiring a service might not make sense for you as a new business owner. If you plan to be at your business address during regular business hours, you can certainly serve as your own registered agent. Hiring a professional service can have more benefits once your business expands and is operating in multiple states. Trying to be your own registered agent in multiple states is close to impossible, as this would require you to be at both physical locations at once. A professional registered agent service will have locations in all 50 states and will be able to meet these state requirements while allowing you to avoid the stresses of having to be available during all regular business hours.

Conclusion and Next Steps

When you form a limited liability company it is a big milestone for any entrepreneur, but it's really just the beginning of everything. You will want to carefully think about your tax structure and staying compliant with state and local regulations that are required, and you should draft a comprehensive operating agreement and implement strong risk management practices. These steps will help set your business up for long-term success and this protects your personal assets which is very important for business owners.

The next steps that you will need to take after forming your LLC will include filing your articles of organization with the state, and obtaining an employer identification number (EIN) from the IRS which is required for most businesses. You will also need to open a dedicated business bank account for your LLC and securing any required business licenses or permits that might be required by your business industry. It's also a good idea to consult with a tax professional or business advisor so you can ensure you're meeting all regulatory requirements that are needed and making the best decisions for your business structure which can get complicated.

With the right foundation and ongoing support, your limited liability company can thrive and be successful. This gives you the flexibility, protection, and confidence that you need to achieve your entrepreneurial goals that you have set for yourself and your business.