Questions to Ask When Forming an LLC (What You Must Know)

Published by Delina Chantel Yasmeh | Author

Last updated: September 17, 2024

FACT CHECKED by Lou Viveros, Growth & Transition Advisor

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Starting your own limited liability company is an excellent way to gain some liability protection without certain disadvantages.

With years of experience in business and entrepreneurship, I recognize the importance of asking the right questions for a successful LLC formation process.

After conducting exhaustive research and consulting with legal experts, I've compiled a definitive list of crucial questions to consider when forming an LLC.

This comprehensive guide will highlight the essential inquiries every aspiring business owner must address to navigate the complexities of starting an LLC.

Quick Summary

• Forming an LLC requires asking key questions about naming, membership limits, investor needs, and the necessity of a registered agent and operating agreement.
• Initial and ongoing costs, including state filing fees and annual expenses, are crucial considerations for LLC formation and maintenance.
• The recent data from the US Small Business Administration, showing a remarkable 1.4 million establishments launched between March 2021 and March 2022, demonstrates the increasing appeal of LLCs among entrepreneurs looking for a balance between liability protection and operational flexibility
• One of the first questions I ask my clients is whether they will need investors to form an LLC, even more so when they require additional capital to establish and grow their business.

How Do I Start Forming an LLC?

To start forming an LLC, first check the specific requirements of your state as they can vary significantly. Typically, this process involves selecting a unique business name, filing articles of organization, and paying the necessary fees.

Generally, you'll need to file articles of organization with your state's secretary of state or other agency tasked with overseeing businesses and create bylaws and an LLC operating agreement, both of which outline the rules and procedures for your LLC.

How Do I Name My LLC Business?

To name your LLC business, first ensure the name is unique and adheres to your state's naming regulations. Conduct a name search to confirm it is not already in use by another company.

We did this, then we checked our state's business name regulations and guidelines to ensure compliance.

We recommend incorporating descriptive terms that relate to your business's nature while avoiding generic or misleading names.

Opt for a professional and straightforward name that conveys your brand identity. It's crucial to remember that your LLC name should be memorable and distinguishable.

Taking these steps will aid in securing a legitimate and recognizable name for your LLC business.

What is the Cost Required to Form and Maintain an LLC?

The cost required to form and maintain an LLC can vary based on location and specific requirements.

Based on our experience, the expenses include filing fees, state registration charges, and legal service fees.

Here is what you need to know:

1. Formation Costs

To start an LLC, you will need to consider several expenses, including filing fees, legal services, and business permits. Filing fees vary by state, but on average, they can range from $50 to $500.

Engaging legal services for assistance with drafting operating agreements or obtaining industry-specific licenses can add to the initial cost.

2. Ongoing Costs

After forming your LLC, there are some essential ongoing expenses to consider. Annual registration fees, franchise taxes, and renewal fees can vary by state, ranging from $50 to a few hundred dollars.

Additionally, having a registered agent to handle official documents may cost between $100 to $300 per year.

Therefore, we recommend budgeting for these ongoing expenses to maintain your LLC's good standing and compliance with state regulations.

3. Separate Business Bank Account

We advise you to open a dedicated business bank account for your LLC to maintain proper financial records and protect your assets.

Setting up a business bank account is usually straightforward and can be done with a few hundred dollars.

Do I Need Investors While Forming an LLC?

You will need investors to form an LLC if you require additional capital to establish and grow your business. However, it's crucial to remember that forming an LLC is possible without investors, depending on your financial capacity and business objectives.

Based on our experience, while not mandatory for forming an LLC, investors can provide financial support, which may help cover startup costs, operational expenses, and expansion plans.

Having investors can aid in boosting your business's potential for success by providing expertise, resources, and industry connections.

Investors' involvement can also add credibility and legitimacy to your venture, attracting potential clients or partners.

Do I Need an Attorney to Form an LLC?

You don’t need a business attorney to form an LLC. Creating a limited liability company (LLC) is a straightforward process that can be done independently.

Numerous online platforms and government websites offer user-friendly guides and forms, making the process accessible and cost-effective.

However, we advise seeking legal counsel to aid in ensuring compliance with specific state regulations and addressing complex legal issues.

If your business has unique requirements or faces intricate legal matters, consulting with a knowledgeable attorney may be beneficial.

When it comes to self-employment taxes, an attorney can also be helpful. As a business owner, you pay employment taxes on your net income.

Do I Need an Accountant or Tax Lawyer?

You need an accountant or tax lawyer for an LLC to ensure proper financial management and compliance with tax regulations [2].

In our case, we use accounting software to manage our financial and tax operations.

An accountant keeps track of your company's financial records and prepares the Internal Revenue Service (IRS) report each year [3].

They also help with filing the annual franchise tax in most states. A tax lawyer enables you to file the IRS report each year, but they also help with the owners' personal tax returns.

This is why it is essential to find an accountant who can do both jobs for you, so that way, one person doesn't have to keep track of two sets of records.

Deciding whether you need an accountant or a tax lawyer may depend on you and the size of your business.

What Is a Registered Agent?

A registered agent is a third-party individual or business entity that acts as the official contact for a company or organization in the state where it is registered.

The registered agent's responsibilities include accepting legal notices and processes served on the company and forwarding any relevant documents to the appropriate individuals within the company.

Selecting a registered agent for your limited liability company is a critical decision that can significantly impact your business's compliance and legal matters. An ideal registered agent should be a trustworthy, reliable entity with a physical address in the state of registration.

What Is the Federal Employer Identification Number?

The federal employer identification number (FEIN) is a unique nine-digit number assigned to businesses and organizations by the Internal Revenue Service (IRS) [4].

The FEIN is used to identify taxpayers for tax purposes, and we advise you to include it in all tax forms and correspondence.

The FEIN is also used to report employment taxes and obtain government services.

What are the Benefits of Forming an LLC?

The benefits of forming a limited liability company include personal liability protection.

For example, if someone sues your business and wins, their only legal recourse is to go after the company's assets.

The benefits of forming a limited liability company can significantly impact your business structure, financial management, and tax obligations.

Here are some of the benefits we encountered after forming our LLC business:

1. Limited Liability Protection

As the name suggests, a limited liability company limits the personal liability of its members, ensuring that their assets are protected from business debts and legal liabilities.

This means that if the limited liability company faces financial challenges or lawsuits, the member's assets, such as homes or savings, are generally shielded from the business's financial obligations.

2. Separate Legal Entity

By forming an LLC, you establish a separate legal entity for your business. This separation ensures that the business's finances and activities are distinct from your personal affairs.

It enables you to open a dedicated business bank account, which simplifies financial management and facilitates accurate bookkeeping.

3. Flexible Taxation Options

LLCs enjoy many tax benefits, providing an advantage over other business structures. By default, an LLC is a "pass-through" entity, meaning the business's profits and losses are "passed through" to the individual members, and taxes are filed on their personal tax returns.

This avoids double taxation, common in corporations. However, LLCs have the flexibility to choose to be taxed as a corporation if it suits their financial needs better.

4. Simplified Compliance Requirements

Compared to corporations, limited liability companies generally have less complex compliance requirements, making them an attractive option for small and medium-sized businesses.

LLCs have more straightforward annual reporting and less formal paperwork. This simplicity saves time and reduces administrative burden, allowing business owners to focus more on growing their ventures.

How Many Members Can LLCs Have?

LLCs can have a flexible number of members, typically ranging from one to several hundred. While most states allow single-member LLCs, the exact limit can vary, with some states permitting unlimited membership.

For example, California LLCs can only have up to 100 members, and Texas LLCs can only have 75 members.

If you're unsure about the maximum number of members for your state, contact your state's business services office.

What Is an LLC Operating Agreement?

An LLC operating agreement is a document that governs the internal affairs of an LLC.

This includes how each member's ownership interest in the business is determined, how they make decisions on major company issues, and other rules for doing business as an LLC.

FAQs

References 

1. https://www.lendingtree.com/business/small/failure-rate/
2. https://www.investopedia.com/terms/f/financialaccounting.asp
3. https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits
4. https://www.irs.gov/taxtopics/tc755