How to Form an LLC
The pandemic has given many people a fresh perspective on how to shore up financials to keep themselves and loved ones safe and secure. While there have always been advantages to starting your own business, never has it been more clear than now, since the government has implemented the Paycheck Protection Program (PPP) for small businesses. Many individuals have suffered financial losses during the pandemic, but it’s small business owners that have the chance to get relief in the form of forgivable loans from the SBA. For this reason, you may be thinking of forming an LLC for your own real estate dealings. If so, read on to learn how to form an LLC.
The Benefits of Forming an LLC
The primary reason why people form an LLC is to protect personal assets from activity related to financial transactions. In real estate, you may have dealings with other businesses or individuals that could leave you exposed to certain legal complications. This isn’t so much the case with turnkey rentals. Turnkey rentals with MartelTurnkey are set up in such a way that owners are kept far away from personal interactions with tenants. Also, property managers ensure that all laws and regulations are followed. If some legal situation were to develop, the landlord could be certain that no improprieties had taken place. However, we realize that many of our clients have other real estate transactions besides our turnkey rentals. In those cases, forming a corporate veil of protection in the form of an LLC is a prudent course of action.
Forming an LLC also has definite financial benefits, as alluded to earlier. LLCs might qualify for PPP assistance. If the economic woes of the pandemic continue, this could be of comfort, knowing that government help might be available. Another benefit of forming an LLC is the tax benefits. Operating real estate transactions as a qualified business entity rather than as an amateur investor allows for certain tax deductions not available to individual filers. Your CPA can give you the details of the tax benefits of forming an LLC.
How to Form an LLC
Forming an LLC is very straightforward. There are specific steps which you take. If you follow them to the letter, you’ll have no difficulty in forming an LLC that you can use for as long as you like. The steps are outlined here.
Choose a Name For Your LLC
The state where you register your LLC may have rules about what name you can assign to your LLC. Naturally, you can’t use a name that’s already in use; but you may also not be able to use a name that’s markedly similar to another that’s in use. You will also likely need to use a name that ends with LLC, Limited Liability Company, Limited Company, or something similar. It’s not recommended to use your own name for your LLC, since one of the benefits is anonymity. Choose a name that has meaning for you without divulging clues about your identity.
Decide Where You Want to Incorporate
Depending on where you choose to incorporate, you may benefit from attractive tax laws. You don’t have to incorporate in the state where you reside. Many people choose in incorporate in Wyoming, which is one of the best—if not the best—states to incorporate, due to their affordability and exceptional protection for LLC owners. For ease, we recommend that you just use an agency that can take care of forming your LLC for you. LLCGenie can set you up with an LLC incorporated in Wyoming for a nominal fee. All you need to do is add the incorporation to your cart, answer a few questions and the rest is all done for you.
File Articles of Incorporation
If you decide not to use LLCGenie, you’ll need to perform all the remaining steps yourself. The next thing would be to file articles of incorporation in the state where you decided to incorporate. Migrate to that state’s website, where you’ll find templates for the necessary articles of incorporation. Typically, you can file the form online and pay a fee that will range around $100 or $200.
Choose a Registered Agent
Next, you need to choose a registered agent, but only if you incorporate outside of your own state of permanent residence. If you incorporate in your own state, you can act as your own registered agent. The registered agent is simply an entity that can accept correspondence and documentation for the LLC. It’s basically like a contact entity. The law requires this so that if anyone sues the LLC, they have a name and address to send papers to. There are numerous private companies that provide registered agent services for a small annual charge. If you use LLCGenie, this is taken care of for you.
Decide Between Member or Manager Management
If just you or you and your spouse will be sole managers of the LLC, then you would opt for Member Management. If you plan to involve outsiders in the management of your LLC, then you would choose Manager Management. Most LLCs are filed as Member Managed.
Have an Operating Agreement in Place
Although an LLC does provide a corporate veil of protection, the veil can be possibly be pierced if a claimant can prove that the company is not actually being treated like an LLC. One way to prove that the company is being run like a formal LLC is to have an Operating Agreement in Place. The Operating Agreement is just a document that outlines how the LLC will be run, such as who’s in charge of what, what their titles are, what their compensation will be, etc. You don’t have to give this Operating Agreement to anyone unless necessary. Just keep it in a safe place along with the rest of your LLC documentation. You can download Operating Agreement templates from online and then tweak the particulars to suit your needs. For a small additional fee, LLCGenie can do this for you, too!
Get an FEIN
An FEIN is a federal employer identification number. This number is like a social security number for your business. You’ll use it to file tax returns and to get business credit if you choose to in the future. Even if you have no employees and it’s just you, you’ll still need that FEIN. This is something that LLCGenie can easily take care of for you.
Apply For a Business License
Depending on where you live, you may need a business license to operate an LLC in your state. Most states require one, if only to increase state revenue. Note that even if your LLC is incorporated in another state, you still may need a business license for the state where you reside, since the actual operation of the LLC will take place wherever you and/or your employees live.
Prepare to Pay State and City Taxes
Most states and local governments require businesses to pay some form of business taxes. Consult with your local authorities to determine what the mandates are so that you can be sure to comply with all tax regulations.
File Annual Reports
Wherever your LLC is incorporated, you’ll need to file an annual report for that state. An annual report can be very complex–as in the case of public companies–or very simple, with just a line stating that you’re still in operation, who your principals are, their titles, the address of your registered agent and the date. Many states even offer a simplified form that takes less than five minutes to fill out. There will be an annual fee each year that you file, which is usually in the range of a couple of hundred dollars or less. If you supply your email address, the state can send you a reminder to file each year.
That’s it. The steps to forming an LLC can be tedious and time-consuming, which is why we suggest you make life simpler by using a service like LLCGenie. But even if you decide to do everything yourself, you can be set up and in business in very little time. Forming an LLC isn’t necessary and it’s not for everyone. But for those who see the need, an LLC can be very convenient and beneficial.