When thinking about issues related to employee compensation and benefits, there are plenty of considerations to balance. One that often goes overlooked is the fundamental structure of the company itself. Simply put, the legal structure of your business organization can have a huge impact on the flexibility and ease with which you hire and pay your personnel.
Case in point: Businesses that choose the Limited Liability Company (LLC) format have some distinct advantages, particularly with regard to employee compensation and finance. But what are these benefits, exactly? And what are the steps required for LLC formation?
A Quick Introduction to the LLC
The LLC is one of the most popular business structures in the country, particularly with smaller and mid-sized companies.
It’s important to understand that, when anyone starts generating income on a self-employment basis, the government automatically classifies them as Sole Proprietors. When you’re a Sole Proprietor, there’s effectively no legal distinction between you and the company itself. This legal structure has its advantages but also some drawbacks, not least a high level of complexity when it comes to hiring employees and administering payroll.
When you register your company as an LLC, you create a new legal entity. In other words, you allow the government to perceive you and your business as two distinct things. This has some major advantages, such as the ability to keep business assets/liabilities separate from personal ones. Also, an LLC makes it much easier for you to staff your team and administer compensation.
LLC Benefits, Explained
Some additional LLC benefits include:
- The business owners are shielded from legal liability, including litigation and creditors.
- The company can choose from multiple IRS reporting models.
- There’s plenty of built-in flexibility with regard to day-to-day administration of the company.
- Reporting and other regulatory requirements are pretty minimal.
With regard to employment, it’s important to note that LLCs have an easy time getting employer identification numbers (EINs) and administering salary and benefits, which isn’t the case with Sole Proprietorships or Partnerships.
How to Register an LLC
Clearly, the LLC format can be tremendously advantageous. Now the question is, how do you start one?
The specific requirements for an LLC can vary from state to state. For example, here is a guide for forming an LLC in Wyoming. The guidelines in Florida or Delaware might look a bit different. It’s always wise to confirm specific details with your Secretary of State. With that said, the typical process looks more or less like this.
1) Choose a name for the company.
When selecting a name for your business, it’s always important to think in terms of branding and marketing. But for LLCs, there are some added legal dimensions. That’s because LLCs must choose names that are not already in use by other LLCs in the same state.
It’s usually pretty simple to determine whether a given name is up for grabs. Most states offer online directories where you can easily ascertain whether the name you want is still available.
Once you’ve secured a unique name for your LLC, consider partnering with a digital strategy expert to ensure your brand’s name not only stands out legally but also resonates powerfully in the digital landscape, enhancing your online presence and marketing efficacy.
2) Pick someone to be your Registered Agent.
In addition to choosing the best name, you’ll also need to choose either an individual or an organization to serve as your Registered Agent. A Registered Agent is someone who is legally designated to receive legal and tax correspondence on the company’s behalf, and every LLC is required to have one.
In some states the business owner or an employee (even an HR employee!) can serve as the Agent, but it’s more common to choose a third-party service. The most important thing is selecting someone who has a physical mailing address (not a P.O. Box) within the given state.
3) File your paperwork.
Surprise, surprise… starting a new legal entity involves some government paperwork!
Actually, the demands for an LLC are not too onerous. The main thing you’ll need to do is file Articles of Organization. This is a pretty basic document that denotes things like the name of your company, a list of partners, and the name and contact information for your Registered Agent. It may also be required for you to provide a synopsis of your company’s mission and scope.
When filing, you’ll also need to pay your state’s filing fee. The amount can vary, but it’s often pretty reasonable, as in under $100.
4) Draft a constitution.
While it isn’t a legal requirement, it’s usually wise to create a constitution to govern your business. Specifically, create an Operating Agreement, which can detail how you allocate duties between different partners.
Having an Operating Agreement can make it easier to manage the company day in and day out, and it may also help you address any legal disputes that arise later on.
5) Get your EIN.
Once the business is registered as an LLC, it should be incredibly easy to apply for that EIN. This number can be obtained from the IRS, and is free to American residents.
You won’t necessarily need the EIN right away but you will need it before you can file your taxes or administer payroll.
6) Create a bank account.
Before an LLC can pay its employees, it has to have a bank account. It’s critical to set up a business account that isn’t connected to anybody’s savings or checking account. Indeed, one of the golden rules of the LLC is to always keep personal assets and liabilities in one pot, business assets and liabilities in another.
LLCs Yield Many HR Benefits
The legal structure of your business can have a major impact on HR functions, including employment benefits and payroll. Often, the LLC format is the best bet. Follow these steps to get your LLC up and running, smoothly and successfully.
Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about content and social media marketing. Additionally, she writes regularly about topics related to HR and small business ownership.