Are you ready to start your own business but not sure how? North Carolina is one of the most straightforward states in terms of filing paperwork and setting up an LLC.
This article will provide all the steps needed to complete the North Carolina LLC set up, including what documents are required and which forms need to be filed with the state.
We'll also discuss North Carolina's advantages and disadvantages so you can make an informed decision about whether this is right for your needs.
What Is a North Carolina LLC, and How Does It Work?
A limited liability company (LLC) in North Carolina is a business structure that is established by filing Articles of Organization. These Articles are filed with the North Carolina Secretary of State.
LLC members are entitled to protection from personal liability for LLC debts or claims.
An LLC's creditors cannot come after your personal assets unless there isn't enough money in the LLC bank account to cover it.
This type of shield between you and your company can be very beneficial if something goes wrong down the line, so you won't have to worry about losing other assets like your house or car because they weren't used properly by someone else.
A North Carolina LLC is run much like any other business entity, with officers (members) who handle tasks such as signing contracts on behalf of the LLC, taking minutes at meetings, and so on.
Why Should I Form a North Carolina LLC?
There are several reasons why entrepreneurs decide that LLC is the right business structure for them, even as a foreign LLC.
One of the most common is that it provides some personal liability protection.
A North Carolina LLC can also help streamline operations when dealing with suppliers because many businesses require proof from LLCs before entering into contracts.
In addition, an LLC gives owners the freedom to divide their interests in ways that may not always be possible under another type of business structure like a corporation.
For example, if a member wants out but doesn't want to sell their interest back to the business for fear of losing control, then they could instead transfer membership by selling all rights associated with being part of the LLC.
Advantages of Forming a North Carolina LLC
A North Carolina LLC can serve as a vehicle to protect the personal assets of LLC owners from any liability that may arise over business operations.
An LLC in North Carolina is responsible for paying taxes, but it limits profits and losses on individual members' capital contributions.
In addition, an North Carolina LLC offers a limited management structure which means decisions are made by majority vote unless otherwise specified in articles of organization filed at the time of formation.
This allows certain minority interests more flexibility than they would have if operating under a corporation where larger shares equate to greater control rights.
Disadvantages of Forming a North Carolina LLC
Setting up an LLC in North Carolina carries a lot of benefits, but there are also some disadvantages. LLCs in North Carolina must pay an annual tax on all LLC income over the course of a year, even if the LLC had no activity during that time period.
The annual filing fee is $202, amounting to the electronic filing fee ($2) and the state filing fee ($200). Filings by mail are sent to the North Carolina Secretary of State.
The other major disadvantage is that LLC members are responsible for paying self-employment tax on LLC distributions. In contrast, a shareholder in an S corporation or C corporation is exempt from this.
In addition to these disadvantages, there's the fact that LLCs cannot issue stock, and therefore it's harder to raise money when you have an LLC because you can't get investors who would like equity in your business.
Unlike some other states, North Carolina LLCs have to file an annual report at a $200 fee. The failure to file your annual report will lead to LLC dissolution.
Types of North Carolina LLCs
The state of North Carolina recognizes limited liability companies (LLCs) as business entities with limited liabilities. This means that their owners are not held personally liable for debts or lawsuits if the LLC is sued, goes bankrupt, or otherwise fails to pay its bills.
A single-member LLC has one owner who receives all profits from the company by default. There is no need to allocate them like in a multiple-member limited liability company formally.
However, this form requires you to file your personal income tax returns separately since it's technically two separate legal entities – the limited liability company and the other an individual.
A multi-member LLC often has two or more members who may be individuals (natural persons) and/or other limited liability companies.
The number of members in the LLC is not limited to only natural persons; entities such as corporations and limited partnerships can also become LLCs depending on their organizational documents and tax election.
A limited partnership allows one or more general partners to manage the business while allowing any number of limited partners (investors) to invest without controlling management decisions.
Not all states allow for this type of arrangement, but North Carolina does.
A limited liability partnership is a business entity that has some but not all of the rights or abilities to sue or be sued available to partnerships at common law with one major exception: it cannot enter into contracts as partners can under fundamental principles of agency.
This means that LLCs have limited liabilities just like corporations do while they offer most benefits of operating as either sole proprietorships or general partnerships (i.e., enjoying pass-through taxation).
A corporation is a legal entity separate from its owners and officers who create them by filing articles of incorporation prior to opening for business.
This is an important distinction from limited liability companies created by filing a document called articles of organization.
How to Set Up an LLC in North Carolina?
Setting up an LLC in North Carolina is easy. The state of North Carolina has several different forms for small business owners to choose from when filing the necessary paperwork.
Each form is completed online or by mail and then submitted along with a filing fee.
There are a few steps you need to perform before your LLC registration is complete.
Step 1: Choose a Name for Your North Carolina LLC
The first step is to choose the business name of your new company. With LLCs, you mustn't use similar names as existing businesses to avoid confusion and potential lawsuits over intellectual property infringement.
If you already own an established brand or trademark, then this may be more difficult than if you're just beginning an LLC with something clean and fresh.
You can search the available names on several websites, including State Business Registration Division, N.C. Trademark database, and U.S. Patent and Trademark Office Trademark Electronic Search System.
Keep in mind that North Carolina requires approval of certain words such as "corporation," "incorporated," or another state's name, so double-check before filing any paperwork.
LLCs are also required to use a variation of "limited liability company" in their business name. These include "limited company," "limited liability co.," or "ltd. liability co." LLCs are not required to have the word "Limited" in their LLC name.
However, it is recommended that you do so to avoid any confusion with other business entities such as general partnerships, limited partnerships, and a sole proprietorship, which can be written without the word "company" in its title.
The restricted terms you can't use in your LLC name are Bank, Savings and Loan Association State, or any other term associated with government agencies.
The moment you pick your desired name, ensure no other active companies are operating under it. You can search for availability on the North Carolina Secretary of State website.
You can also make an LLC name reservation request, but this is only good for 120 days.
By filling out the Name Reservation Form at a $30 fee, your desired business name will be reserved for the next 120 days, and you'll have that much time to take other necessary formation steps.
Step 2: Hire a North Carolina Registered Agent
A registered agent or a registered agent service is an individual or company that agrees to accept legal papers on behalf of the LLC if it's incapable of doing so itself due to lack of capacity, unavailability, etc.
Just like with any service you hire for your business (such as bookkeeping), make sure you check references and do thorough research before committing yourself financially.
Fees vary depending on location and type of registered agent but can be upwards of $40 annually plus filing fees per document filed.
A registered agent service will provide guidance through the filing process if needed and other legal matters concerning your LLC so that it can stay in good standing with the state.
Requirements you need to keep in mind are that the North Carolina registered agent must have particular qualifications or experience, have a physical address in North Carolina and be of legal age.
The registered agent services should be available to you and third parties during normal business hours.
It would help if you had a reputable and trustworthy registered agent or a service so they can take proper care of business when needed.
But make sure you read through ALL fine print before signing any contracts. Sometimes registered agents will offer additional services such as registered office addresses along with acting as registered agents - just be aware that those "extras" might also cost extra.
Step 3: Obtain North Carolina licenses and permits
Some LLCs in North Carolina are regulated by state laws and rules that require business owners to obtain certain business licenses or permits.
For example, an LLC operating as a public utility in North Carolina is required to hold a certificate of public convenience (CPCN) which authorizes the company to provide service within the state's boundaries.
Licensing requirements for LLCs in North Carolina are established by the state's Department of Commerce.
Check with your local city hall for information on licensing requirements in your area - you can also contact the North Carolina Secretary of State Office before making any decisions about hiring vendors, so you are aware every step of the way.
The Certificate of Registration you need will depend on the business activity, where your business is located, and what kind of entity you have formed.
A general LLC license, vendor's license, professional business license, public utility business license, and a home occupation permit can all be acquired from the North Carolina Secretary of State or its corresponding county or city agencies.
Federal LLC licenses are issued by the North Carolina Secretary of State's office. Before applying for a license, check with the local city hall to determine if any additional requirements may apply to specific types of businesses within its jurisdiction - this will help avoid delays or errors when submitting required documentation later on.
If you have little to no experience, having your North Carolina LLC set up by professional service is always the safest option. They can deal with the North Carolina Secretary of State and other government agencies.
Step 4: File Your North Carolina Articles of Organization
North Carolina LLC Articles of organization represent the formal establishment of your North Carolina LLC and contain the information required by North Carolina law.
The articles of organization must include: - business name (it cannot be deceptively similar to another registered trade name)
List members/managers or number it is authorized to conduct business in North Carolina; if there are no managers, then all members will be listed as individual signatories on the legal documents
Provide an address for service of process (i.e., where legal notices can be sent) outside that state; this may need filing separately with each specific jurisdiction
This can be done online and costs $125 for a standard online filing.
Depending on your North Carolina LLC (domestic or foreign LLC) type, a domestic limited liability company will file Form L-01. In contrast, a foreign LLC files Form L-09 (the Certificate of Authority for Limited Liability Company) at a $250 filing fee.
Articles of the organization should include:
- The name of the business.
- Duration.
- Principal office address where required state tax reports are sent.
- Purpose & type of LLC.
- Number/type members in LLC.
Step 5: Make a North Carolina LLC Operating Agreement
LLC operating agreements are written agreements that govern the internal affairs of an LLC.
LLCs are typically governed by the operating agreement unless they are bound by a standardized operating agreement adopted either through legislation or within their articles of formation.
Operating agreements can also spell out how business profits and losses will be shared and who has what percentage to vote on major decisions regarding business operations.
The LLC operating agreement should address these topics:
- Management structure
- Voting rights for members
- Allocation & distributions of income, deductions, credits & tax allocations among members
- Transferability/assignability of membership interests (or management positions)
- Buy-sell provisions dealing with member departures and new member admissions to the company
You are not required to file your operating agreement with the North Carolina Secretary of State.
The Operating Agreement is an essential part of North Carolina LLC's setup, and it can be used as a business plan if you want to expand your business or change something about the company structure. It should cover all aspects of operating, such as how they will make decisions, who has voting power, etc.
Even though an operating agreement is not required by North Carolina law, we recommend that you create one. It applies regardless of whether there are only two owners involved or more than 100 because the operating agreement protects everyone's interests and lays out rules for running a successful business together.
Step 5: Obtain an Employer Identification Number
After making the operating agreement, LLCs that have employees or plan to hire employees will need to obtain an EIN. A federal employer identification number is a nine-digit federal tax identification number that the IRS assigns and uses for tax reporting purposes.
The EIN applies not just to financial transactions but also legal ones as well, such as opening a business bank account or acquiring business insurance.
An LLC must have either an EIN or a social security number assigned before it can apply for any other type of business license in North Carolina, such as state sales tax certificate, city business license, etc.
Suppose you're uncertain whether your company needs one. In that case, we recommend you contact IRS directly and discuss this matter with them since they'll be able to provide everything required considering your situation and help come up with solutions tailored specifically to meet your needs.
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How Are North Carolina LLCs Taxed?
LLCs are generally treated as disregarded entities by the Internal Revenue Service. That means they are not taxed as a separate entity, and any income or loss is reported on their owner's tax returns.
The Internal Revenue Service allows LLCs to apply to be classified as an S Corporation for tax purposes. This can help you save money on self-employment taxes by classifying some of your earnings as salary and others as distributions or withdrawals.
Additionally, any revenue you take out of your North Carolina LLC is subject to regular federal income tax. The amount of income tax you pay is determined by your earnings, deductions, and other relevant criteria. State income tax is payable to the North Carolina Department of Revenue.
Federal taxes are due annually, and you file them through Schedule C (for single-member LLCs) or Partnership Return (Form 1065) for multi-member LLCs.
Self-employment taxes are different. LLC members are not employees of their own company, so they do not pay these taxes. They do, however, pay self-employment tax on profits LLC makes. In case your LLC sells physical goods, you'll have to pay sales tax on products as well. The sales tax rate for N.C. is 4.75%.
Lastly, LLC owners pay payroll tax on the salaries paid to employees, who then pay federal and state taxes on their individual earnings.
North Carolina LLC FAQs
How Much Does It Cost to Open a North Carolina LLC?
The registration filing fee is $125. You are required to pay this fee upon filing the Articles of Organization for your LLC in North Carolina. This amount doesn't include the ongoing costs and the cost of the registered agent, provided that you decide to hire one.
Who Can Be a Member of My North Carolina LLC?
Anyone can be a member of your LLC in North Carolina, including other business entities like other LLCs, corporations, a North Carolina resident, etc. However, the ownership requirements are slightly different. A minor can be a remember but can't be the owner, for example.
Is North Carolina a Good State for LLC?
Yes, North Carolina is a good state for LLCs because it's fairly cheap to set it up ($125) compared to other states, like Massachusetts or Nevada, where filing costs are three to four times that much.
How Fast Can I Get an LLC in North Carolina?
The North Carolina LLC filing is a one-week procedure, but if you pay to expedite it, it might be over in as little as one day. The extra $100 for processing in two days, the additional $200 for processing in one day, and the extra $300 for processing in four hours are all available.
Do I Need a Dba for My LLC in N.C.?
Yes, an LLC in N.C. will need an assumed business name certificate if they plan to expand their business to other products or services but don't want to use the same name. You can perform this step after you register your LLC. The application for DBA is filed with the Register of Deeds.
Can I Be My Own Registered Agent in North Carolina?
Yes, you can be your own registered agent for an LLC in North Carolina, provided that you are of legal age and you have a physical street address in the state. However, paying state taxes to the North Carolina Department of Revenue could be too much if you have no experience. It also applies when filing the operating agreement for your LLC.
How Do I Change My Sole Proprietorship to an LLC in North Carolina?
If you want to change your sole proprietorship to an LLC in North Carolina, you must follow the same procedure you would otherwise follow if you were to start an LLC from scratch. That includes obtaining new business licenses and permits, filing new paperwork like operating agreement, and deciding on your taxation.
Conclusion
Setting up an LLC in North Carolina can be a daunting task. You have to consider many factors before you make any decisions, including the type of business entity you are setting up and how to minimize your tax liability.
If you're not careful, it's easy for missteps along this journey to lead to costly mistakes that could derail your company from achieving its full potential.
To help mitigate these risks, always follow these steps when creating a North Carolina LLC so that all bases are covered.
Another option is to have a service provider like ZenBusiness create the company on your behalf.
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