If you want to start a business in the US, there are a standard series of steps that you need to go through to complete the process. The ease with which you do so depends very much on the state in which you want to operate as some states offer better incentives for starting a business than others.
There are also varying requirements depending on the type of business you want to start. The requirements for incorporating a corporation are different from those for forming an LLC. This article will examine the definition, requirements, and other variables involved in forming an LLC, and look at which states offer the most favorable conditions. Finally, we will review the process of LLC formation in the state of Delaware.
What is an LLC?
A Limited Liability Corporation (LLC) is a US business entity that protects its owners from personal responsibility from liability. LLCs differ from corporations in that the members of LLCs are the owners of their investments, whereas corporations might own shares in their companies but not their corporate assets.
LLCs consist of members. Individuals can be members of LLCs, but banks and insurance companies cannot. Those members who have profits and losses from an LLC must report the amounts gained and lost on their individual tax returns.
The rules involved in LLC formation and other regulations vary from state to state. Because of the comparative ease of running an LLC, these types of businesses have become very common in the US.
State-by-state variables to keep in mind
The processes of forming and maintaining an LLC have varying degrees of complexity from state to state. Before you get started, it would be a good idea to do thorough research on these factors in your state in order to be sure that conditions will be adequate for your business to function. Considerations include the following:
The number and nature of state business regulations
Business regulations can vary considerably from state to state. Alabama, California, and Florida have among the strictest regulations for businesses. Some of the things to keep in mind regarding regulatory considerations include the following:
- Covid-related regulations. States continue to impose vaccine mandates variably, so it is a good idea to read up on your state’s policies to make sure that your employees meet the requirements. Virginia ranks highest in the strictness of Covid requirements.
- Healthcare reform and insurance requirements. In some cases, employees may have the opportunity to purchase their own insurance plans. Depending on individual need, it may be desirable to offer this option, but not all states allow for it.
- Pay equity requirements. States have widely differing policies with regard to whether pay equity is enforced in regard to gender, race, or other demographic features. In a recent study, the state of Vermont indicated the highest level of pay equity, whereas Wyoming indicated the lowest.
Another major consideration is taxation rates in the state where you want to start your business. The types of taxes that you should consider include the following:
- Corporate tax
- Income tax
- Sales tax
- Property tax
New Jersey and Minnesota are known for having the highest corporate taxes in the country, whereas Massachusetts has the highest rate of income tax.
Cost of living
In addition to the formal requirements of taxation and other business-related fees you will have to pay, you should also take into consideration the cost of living in the place where you will be running your business. This will influence both the overall cost of running the business (due to real estate prices, utilities rates, etc), as well as your own personal expenses. In addition, your employees’ salary expectations will be greater in those states with higher costs of living.
The states with the highest cost of living include Hawaii, Alaska, and California, and those with the lowest cost of living include Mississippi, Oklahoma, and Kansas.
The process of forming an LLC in the state of Delaware
We will now look at the steps involved in forming an LLC in the state of Delaware. As this state has among the most straightforward requirements for formation, as well as the lowest costs involved, it serves as a simple paradigm against which others can be measured. Other states’ formation processes involve similar steps, but might have more complex requirements for completion.
Benefits of LLC formation in Delaware
Delaware is by far the most popular state to form an LLC in. In fact, 66% of all Fortune 500 companies choose the state as their location for incorporation. There are a number of reasons that Delaware offers favorable conditions for incorporating a business. For one thing, the general corporation law is straightforward and easy for businesses to follow.
In addition, the Division of Corporations is among the most efficient in the country. It handles a large number of corporate filings on a regular basis, and can do so in as little as a couple of hours if necessary.
Beyond that, Delaware has a state legislature that is very favorable to business interests.
Delaware incentivizes LLCs to be formed in the state that do not operate in the state. Because of the comparative ease of completing the process there, many LLCs choose to take advantage of this. LLCs not operating in the state are not required to pay Delaware income tax.
In addition, Delaware does not require that LLCs have business licenses, as is the case in other states.
Steps for forming an LLC in Delaware
The following are the steps that are necessary to incorporate in the state of Delaware:
Choose a name
The first thing that you need to do is choose a name for your business. The state has specific requirements in the naming process. It must include the words “Limited Liability Company” or “LLC.” Also, if you are including words in a language other than English, you must include a translation at the time of application.
In any given state, it is essential that you conduct a name check to make sure that your desired name isn’t already taken. If it is, you might have to make a slight alteration to your chosen name, even adding a hyphen or some other punctuation, in order to distinguish it from another name that is already registered.
Appoint members and managers
Every Limited Liability Company in Delaware needs to have at least one member or manager. There are no age or residence requirements. Other companies can also be members.
Designate a registered agent
Every company needs to designate a registered agent for the purpose of receiving legal and tax information. It is the primary contact for the state’s Division of Corporations. The agent can be either a person or a business, and must have a physical address in the state (npt a post office box).
It is also essential that the registered agent be accessible during business hours to receive court notices and advertisements. The agent is expected to be there for the life of the LLC.
File LLC formation paperwork
Once you have submitted this information, you will receive a copy of your Certificate of Formation from the Delaware Secretary of State. You then fill in your company information and submit it to the Delaware Division of Corporations.
Get a Federal Employee Identification Number
Every business incorporated in the US must have a Federal Employee Identification Number (EIN). This is the business equivalent to a Social Security Number, and is used when the LLC files taxes, opening bank accounts, and other official purposes.
Determine any additional licensing and permit requirements
Depending on the exact nature of the LLC, there may be additional licenses or permits required to open the business. These licenses or permits may be required at the levels. For example, people who represent certain types of occupations must have designated degrees corresponding to those occupations. This goes for doctors, lawyers, accountants, etc, and also other types of professions.
In addition to licenses, you may be required to obtain different types of permits. These could include health department permits, sign permits, fire department permits, etc. You should also consider zoning requirements as they could affect your business.
Maintenance requirements for LLCs
Once you have completed the process of LLC formation in Delaware, there are requirements that you will have to submit an annual franchise tax of minimum $175 (depending on the size of the company). LLCs in Delaware do not have to submit annual reports. (This is one of the benefits of LLC formation in the state; other states do have this requirement.)
Delaware also does not require LLCs to open bank accounts. However, if you choose to do so, there are specific requirements for how to do it: a designated representative of the LLC must open the account with his or her personal documentation, as well as a copy of the Certificate of Formation.
Review your state requirements carefully
As mentioned above, all of these factors can vary, depending on where you want to operate your business. It is a good idea to investigate these requirements and other considerations for your state in particular before you get started.
In addition, both the requirements of formation, as well as circumstances related to cost of operating, real estate, etc can change frequently, so you should look at where the trends in your area are heading. Many businesses are choosing to relocate to states where business conditions are more favorable.
I know you said only to use one-word links in the case of definitions. My intention here was to lay out these terms, so it seemed applicable.