Limiting Home Business Risk

5 Steps to Forming an LLC

Form an LLC
Keep Your Growing Business Safe with an LLC. Triloks | Getty Images

Trends in the workplace, the economy and digital technologies have spurred home-based business startups. More than half of all businesses in America are now based at an owner’s home, according to the U.S. Small Business Administration (SBA).

Many factors make home businesses attractive: lower startup costs, setting your own schedule, avoiding long commutes or achieving work-life balance. But there are financial and legal risks that you don’t want to bring home with you.

The most popular way reduce these risks is by forming a Limited Liability Company, or LLC.

1. Decide if an LLC Right is for You

If you have no business partners, you can begin as a sole proprietor with minimal costs for licenses or permits, but you might find it harder to secure loans or working capital. More importantly, this leaves you exposed to personal liability for debts your business incurs, actions by your employees or legal claims associated with your products or services.

Forming an LLC separates business liability from the personal liability of its members, which can be one person, several, or even other LLCs or corporations. LLCs combine the liability protection of corporations with less recordkeeping, and more flexibility in how business income, which is “passed through” to members, is treated for tax purposes. Note that LLC members pay self employment taxes (Medicare and Social Security) on the net income of the business.

 Internal Revenue Service Publication 3042  outlines tax treatment of LLCs. After educating yourself,
consult your accountant.

While partnerships, cooperatives or corporations serve some businesses better, most small startups can meet their needs through an LLC. The SBA offers detailed information on choosing a business structure.

Start there, and then consult a lawyer, if you’re still unsure.

2. Budget for Your LLC Startup Costs

Laws governing LLCs vary slightly from state to state, but filing costs to register them vary drastically. Startups in Kentucky pay just $40. If you live in Illinois or Massachusetts, you’ll pay the most—$500. MBA@UNC, UNC Kenan-Flagler Business School’s online MBA degree program recently posted a national map of LLC startup fees along with a list of links to individual state websites. Start there to get a handle on what fees to budget for when it comes to establishing an LLC.

Just as other startup costs vary depending on your business, you may be required to obtain additional licenses, permits or certifications. These vary by state, locality and industry type. For example, a massage therapist must have certain credentials and register with specific regulatory agencies. The SBA offers links to federal and state licensing and permitting agencies which can speed your investigation of this complex subject.

3. Choose Your LLC Name

Your LLC name must be different from any LLC registered in your state, and it must include the term “LLC” or “Limited Company” to make its legal structure apparent.

The state-by-state links compiled by MBA@UNC connect to state websites that typically offer a way to search registered names, so you can check on your choice prior to filing.

Your LLC name need not be identical to your trade name or “doing-business-as” name, but if you think you might incorporate your LLC later (for example to utilize subchapter S tax treatment), you should also search the corporate names. Note that certain businesses, such as banks and insurance companies, are prohibited from forming LLCs, so your state may bar those terms and others from use in your name.

4. File Your LLC Documents

Each LLC must file “articles of organization.” This document contains the business name, mailing address, and names of LLC members. Depending on your state, your articles of organization will be filed with an agency such as the Secretary of State, Department of Commerce, or Division of Corporations and Commercial Code.

This filing is when you incur the fee mentioned earlier.

Although most states don’t require an “operating agreement,” you should have one if your LLC has multiple members. It spells out each member’s percentage interest, allocation of profits/losses, and can provide for continuation of the LLC if membership changes. Otherwise, you might have to form a new LLC if someone leaves the business or dies.

5. Announce Your New LLC

Some states require you to place a public notice of your LLC filing in a local newspaper. Your local SBA office can help you determine your requirements. Even if not legally required to post an announcement, you should consider using this opportunity to gain publicity for your
business.

Newspapers offer relatively inexpensive public notice classified rates. You might also consider a small display ad that could include a website or phone number. You might even create a press release with details about your business and potentially get free coverage by a newspaper or business magazine.

Forming an LLC requires careful thought, substantial research and varying costs, but shielding yourself from personal liability is crucial insurance against business failure. After your LLC is in place, you’ll sleep better in the home that also houses your business.

About the Author: Eric F. Frazier is an independent writer, editor, book reviewer and coauthor of GPS Declassified: From Smart Bombs to Smartphones. He writes from his home near Winston-Salem, NC.