Before we get into the details on how to setup an LLC, it is important for you, the reader, to understand that we are not professional accountants, and this article is based on our understanding of the different corporate structures that can be formed under the laws of the United States (our lawyers made us say this 😊).
They say, Information is power, and rightfully so. In our opinion it is critical to understand the similarities and differences between a C corporation, S corporation, LLC and non-profit. A basic understanding of these structures will help you make an informed decision on the structure of your new business endeavor.
A C corporation refers to any corporation, that under the federal income tax laws of the United States, is taxed separately from its owners. Most major companies and smaller companies are treated as C corporations. A C corporation can have unlimited shareholders foreign and domestic. All earnings and profits are distributed as dividends.
S corporations elect to pass corporate income, losses, and deductions to their shareholders for federal tax purposes. Like a C corporation, an S corporation is generally a corporation under the law of the state in which they are formed. For federal income tax purposes, an S corporation resembles the structure of a partnership. Payments to shareholders are distributed tax free provided that the distributed earnings were not taxed previously. Certain penalty taxes like Accumulated earnings tax, personal holding company tax and alternative minimum tax do not apply to an S corporation. An S corporation cannot have more than 100 shareholders and can only have one class of stock.
A limited liability company (LLC) is a blend of partnership and corporate structures. It provides limited liability for its owners in almost all United States jurisdictions. The primary characteristic of an LLC is its limited corporate liability and pass-through taxation to the owners. It is more flexible than a typical corporation and well suited for single owner companies. An LLC must make its intent known to file as a corporation by filing specific tax forms with the Internal Revenue Service (IRS).
A non-profit organization retains its surplus revenues to achieve its goals rather than distributing them as profit or dividends. While non-profits can generate surplus revenues, they must be retained for self-preservation.
A corporation a living entity that has its own personality and is treated as a natural person under the laws of the United States.
Now that you have a good idea on the different types of corporations lets talk about how you can setup a LLC, the topic of this article.
Following are the general steps in setting up your LLC.
- The first step in setting up an LLC is selecting a state where you will be organizing your LLC. Generally, you want to select a state with no state taxes. However, if your LLC needs a physical presence then you must form the LLC in that state. Wyoming, Delaware, and Nevada are three states with no state taxes. Wyoming has the lowest filing and annual fees.
- Name your LLC. Almost all states have rules around naming your LLC. In general, here are some tips on selecting a name for your new LLC.
Your LLC name must include “Limited Liability Company”.
Your LLC name should be unambiguous and cannot confuse itself with the names of other government entities.
Special words like “Attorney, bank, university” must be avoided. If any of these words need to be part of your LLC, then you will have to file additional paperwork with your state. Check with your state for details of additional paperwork required.
Some states allow you to do a name search and reserve the name for your LLC before filing in return for a nominal fee. Check your state’s corporation division website for this information.
- All LLCs are required to have a registered agent. The registered agent can be anyone like your accountant, attorney, or a member of the LLC. The registered agent must be a resident of the state in which you are setting your LLC. The registered agent will be the one that responds to all legal communication including serving of process.
- File your LLC with the state of your choice by filing your Articles of Organization. Certificate of Formation or Certificate of Organization are other oft used terms used to refer to the Articles of Organization. The AOI lays out the structure of the LLC.
- An Operating Agreement is not required in most states but in our opinion it good to have one. It is a legal document that describes the ownership structure and the operations of the organization.
- Acquire an Employed Identification Number (EIN) from the Internal Revenue Service
(IRS – https://irs.gov). This number is critical for you to do business. You will need one before you can acquire your state’s withholding tax information, communication with any governmental agency and opening a bank account.
Once you have setup your LLC and would like to become a profitable seller on Amazon, head on over to this article to learn more about how to sell on Amazon.