Business owners will typically create a limited liability company, or LLC, for two reasons: to have protections against potential liability, and to have a cooperate structure for taxes and financial management. If the business gets sued, the business owners’ assets are separate from the business and protected from any liability claims. Without any such cooperate protection, someone who pursues a claim or files a law suit could attempt to take accounts, property, and other assets of everyone who has any ownership in the business.
LLC’s are a generally favored form of business entity, because it allows a pass through for tax purposes, which has the benefits of being taxed in the same manner as a partnership. In other words, it is a favorable tax status, while still giving cooperate protections. Additionally, an LLC is much easier to manage than other cooperate entities, particularly a C- corps entity which requires bylaws, more formal meetings, stock issuance, and more cumbersome regulatory requirements. For these reasons, LLC’s are currently the most popular form of entity established as a business. Still, there are certain reasons not to do an LLC, including the intention to issue stock and become publicly traded. Inquiries about the best cooperate structure for a specific circumstance should be directed to legal counsel.
The owners of an LLC are called members. The members can decide to manage the LLC themselves, or they can hire a separate manager or managers to run their LLC. An LLC will obtain a tax ID number, hold its own accounts, and enter into business contracts. The LLC can also hire employees and engage in any business operations permitted by law.
The simple steps are as follows (further explained below):
- Decide whether you should have an LLC.
- Determine a name, address, and scope of business.
- Decide upon terms with any partners in the business and prepare an operating agreement.
- Check with the Colorado Secretary of State website to make sure your business name is available. You might also wish to check with the federal registry to see if someone has already trademarked your name.
- File your information online with the Colorado Secretary of State and pay the state fee.
- File your information online with the IRS to obtain your EIN.
- Conduct your first member meeting, at which you adopt your operating agreement and decide upon business operations.
- Open bank accounts.
- Launch your business.
The establishment of an LLC in Colorado starts with the Secretary of State’s office. Whether formed by an individual, group, or existing business, the LLC first must be registered with the Secretary of State. Such a submission can easily be accomplished on the Secretary of State website, provided the LLC has a name that has not already been taken. The Secretary of State website requires that you provide the name of the LLC, the address, the individual founding the LLC, and the name and address of the registered agent (the person authorized to receive service of legal documents).
After the LLC is registered with the Secretary of State, the LLC can receive its own tax ID (EIN) number. This can be obtained on the IRS website. Watch out for fake websites that charge money. The IRS site issues EINs without charge and within minutes.
With that number, the LLC manager can obtain bank accounts, held in the name of the business. Additionally, an LLC is allowed to register with the federal government as an S-corp. It is best to consult with an accountant concerning the best tax status for the company and to ensure that all of the S-corp requirements are met. If a company violates the S-corp elements, it will be taxed as a C-corp by the federal government, which is typically the worst of tax scenarios. Thus, it is important to consult with legal counsel and an accountant concerning compliance with cooperate status over time.
If the LLC has more than one member, the LLC should have an operating agreement. An operating agreement comprises the agreement among the members and determines such things as scope of business, meetings, votes, membership rights, withdrawals from membership, distribution of profits, and overall management of the company. Without an operating agreement, partnership disagreements are difficult to resolve and often result in dissolution of the company. The operating agreement can be established at any time, but it is best to develop and agree upon the operating agreement as early as possible. Legal counsel is often extremely helpful in the preparation of an operating agreement among multiple members.
Once the LLC has been created, it is important to comply with any other applicable area of law. This would include employees, independent contractors, licensing, regulatory issues, and any other legal issues pertaining to your business. If there are questions concerning these steps or the operation of an LLC, consultation with an experience corporate attorney is very helpful.