04 Jun Navigating the Waters of Business Formation: A Guide to Forming an LLC
Are you ready to take the leap into entrepreneurship? Perhaps you’ve developed a groundbreaking product, or maybe you’re eager to turn your passion into a business. Whatever your motivation, starting a business is an exciting journey—but it’s essential to lay a solid foundation from the very beginning. One crucial step in this process is forming a Limited Liability Company (LLC). Note – if you are forming a different structure – such as a Corporation – your governing documents will be your Bylaws. These are similar but have different requirements. Most start-ups tend to form LLC’s which is the topic of this blog post.
In this guide, we’ll explore what an LLC is, why it might be the right choice for your business, and the steps involved in forming one.
A note – certain occupations require you to form as a “PLLC” which is a professional limited liability company.
Understanding the Basics: What is an LLC?
A Limited Liability Company, commonly known as an LLC, is a business structure that combines the flexibility and tax benefits of a partnership or sole proprietorship with the limited liability protection of a corporation. This means that the owners (referred to as members) are not personally liable for the debts and liabilities of the company – provided they have not exposed themselves to personal liability through not having good procedures and records, etc. That’s generally known as “piercing the corporate veil.”
Why Choose an LLC?
There are several compelling reasons why entrepreneurs choose to form an LLC:
- Limited Liability: As mentioned earlier, one of the most significant advantages of an LLC is the limited liability protection it offers. This means that your personal assets, such as your home or savings, are generally not at risk if your business faces legal action or financial difficulties.
- Pass-Through Taxation: Unlike a corporation, where profits are taxed at both the corporate and individual levels, an LLC can offer pass-through taxation. This means that the profits and losses of the business “pass through” to the individual tax returns of the members, avoiding double taxation.
- Flexibility: LLCs offer greater flexibility in terms of management structure and ownership. There are fewer formalities and regulations compared to corporations, making it an attractive option for small businesses and startups.
Steps to Forming an LLC
Now that you understand the benefits of an LLC, let’s walk through the initial steps involved in forming one:
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- Choose a Name: Select a unique name for your LLC that complies with state regulations. Make sure the name reflects your brand and is memorable to your target audience.
- File Articles of Organization: Prepare and file the Articles of Organization with the Oklahoma Secretary of State. This document officially establishes your LLC and includes essential information such as the name of the company, its address, and its registered agent.
- Create an Operating Agreement: While not always required, it’s strongly advisable to create an Operating Agreement that outlines the ownership structure, management responsibilities, and decision-making processes of the LLC. This document helps prevent misunderstandings among members and provides clarity on how the business will operate. It can also serve as evidence of the separation between your business assets and your personal assets. Most banks also require this document to open a business bank account. If you have multiple members/partners – this is critical to address potential issues, which include buy-sell provisions either in the operating agreement or as a stand-alone buy-sell agreement.
- There are a number of additional steps that are either required or strongly advisable, depending on the particular business, including are any permits/licenses required, are there employees, do you have intellectual property to protect, and so on. There are also other considerations, such as a PLLC mentioned earlier, and for some businesses, the advisability of a series LLC.
Comply with Ongoing Requirements
Once your LLC is formed, be sure to fulfill any ongoing requirements including annual renewal of your LLC with the Secretary of State, tax obligations, and any license-specific requirements. This now also includes your federal Corporate Transparency Act/Beneficial Owner Reporting!
Conclusion
Forming an LLC is a significant milestone in the journey of building your business. By choosing this business structure, you can enjoy the benefits of limited liability, pass-through taxation, and operational flexibility. While the process of forming an LLC may seem daunting at first, with careful planning, and professional advice, you can establish a strong legal foundation for your business venture.
Remember, it’s always a good idea to seek professional advice from a lawyer familiar with business formations to ensure compliance with state laws and regulations. With the right guidance and determination, you can set your business on the path to success as a proud LLC owner. Let’s talk about it. 918-938-1322
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