7 Things to Do After Forming an LLC
Forming a limited liability company isn’t quite as simple as just drafting and filing your company’s articles of organization. Whether you form your own LLC, hire an LLC service, or enlist a business attorney to form your company, the actual formation of your business (along with designating a registered agent) is just the first step on your compliance journey.
Throughout your business life cycle, you’ll need to consider taxation issues and other financial requirements, handle permits and licenses, file annual reports, and more ― and that doesn’t even include the things you’ll need to do if you want to hire employees.
In this article, we’ll walk you through a step-by-step discussion of the most important things you’ll need to take care of after forming your limited liability company. None of these tasks are terribly complicated, but it’s crucial that you complete them properly, or you’ll risk falling out of good standing with your state. You could even rack up some hefty fines, or have the state dissolve your business!
Let’s take a look at the things you need to do to continue operating a compliant LLC after the formation process.
1) Get an EIN
A federal tax ID number (also known as an EIN, or employer identification number) is required for most LLCs. In fact, you’ll need to acquire an EIN if you answer “yes” to any of the following questions:
- Does your business have employees, or do you plan on hiring employees in the future?
- Are you required to file an employment, excise, or “alcohol, tobacco, and firearms” tax return?
- Do you withhold income taxes (not including wages) paid to a non-resident alien?
- Do you have a Keogh plan (a tax-deferred pension plan for self-employed individuals and small businesses)?
- Is your business involved with a trust, estate, real estate mortgage investment conduit, non-profit organization, farmers’ coop, or plan administrator?
To obtain an EIN, you’ll need to complete the online application using the EIN Assistant on the Internal Revenue Service website. Once you’ve finished filling out the forms, the IRS will validate your application, and if you’ve completed the process accurately, they will immediately provide your EIN. At this point, you’re able to download, save, and print your EIN confirmation notice.
You can use your EIN as soon as you receive your confirmation for things like opening a business bank account, applying for licenses and permits, and filing a mailed tax return. However, if you want to file a tax return electronically, make an electronic payment, or pass an IRS Taxpayer Identification Number matching program, you will need to wait until your EIN is included in the IRS’s permanent record, which can take up to two weeks.
2) Open a Business Bank Account
After you’ve obtained your EIN from the IRS, you can pursue opening business checking and savings accounts. There are several advantages to business bank accounts, starting with the limited liability protection that is the centerpiece of forming an LLC. With a business bank account, it’s far easier to keep your company’s finances separate from your own personal funds, which is a crucial aspect of maintaining the personal asset protection provided by the LLC as a business type.
Next, having a business bank account makes your company seem far more professional to your customers and vendors. Instead of writing out a check or paying invoices to your personal name, having people make payments to your business has much better optics. Furthermore, instead of having to handle all of your company’s banking yourself, with business accounts you can have your employees help with the daily operations of your banking on your behalf.
Another major benefit is the ability to easily acquire credit for your business. If you don’t have an established relationship with a bank, it’s still possible in theory to acquire credit, but it’s far more difficult. If you have checking, savings, credit cards, or a merchant services account, the bank is far more likely to provide a line of credit for your company.
In addition to your EIN, some banks have further requirements for opening business accounts, so you should check with your desired bank to see if you need to bring a copy of your formation documents, proof of your business licenses, or other documents.
3) Register for State Taxes
One of the main benefits of the LLC as a business type is the “pass-through” taxation that allows profits and/or losses to pass through the business entity. This means that instead of filing a business tax return, the owner/members of the limited liability company claim business income on their personal returns.
However, each state has its own laws regarding business taxes, so you should never make assumptions regarding your state-level tax responsibilities. Furthermore, if you elect to have your LLC taxed as a corporation, you aren’t eligible for pass-through taxation on the federal or state level.
Depending on your state, the requirements vary quite a bit. The most common state business taxes are business income tax and employment tax. Furthermore, if you sell products or services, you will need to pay sales and use tax in 45 states, excluding only Alaska, Delaware, Montana, New Hampshire, and Oregon. Most often, businesses with employees will also need to pay for workers’ compensation insurance, unemployment insurance, and temporary disability insurance.
There are also 15 states that require businesses to pay a franchise tax, which is an annual fee levied by the state in exchange for the privilege of doing business in that state. The states where you’ll need to pay franchise taxes include Alabama, Arkansas, Delaware, Georgia, Illinois, Louisiana, Mississippi, Missouri, New York, North Carolina, Oklahoma, Pennsylvania, Tennessee, Texas, and West Virginia. In addition, the states of Massachusetts, New York, and South Carolina require business owners to acquire a state business registration number that functions like an EIN but on the state level.
As you can see, there’s a wide range of variations on state business taxes. With this in mind, it’s always smart to check with your state government to see which ones apply to your company.
4) Take Care of Licensing and Permit Requirements
Depending on what type of business you operate, you may also need to acquire certain licenses or permits to enable your company to operate in compliance with government regulations.
On the federal level, there are a number of industry-specific licenses and permits for businesses operating in the following areas: agriculture, alcoholic beverages, aviation, firearms/explosives, fish and wildlife, commercial fisheries, maritime transportation, mining and drilling, nuclear energy, radio and television broadcasting, and transportation and logistics.
Beyond the federal level, things can get a bit trickier. Most states require licenses and permits for many more business activities than the federal government does, and these activities vary depending on which state(s) your company operates in. The most common state-level licenses are required for auctions, construction, dry cleaning, farming, food and beverage service, plumbing, retail businesses, and vending machines.
Furthermore, there are sometimes additional licenses and permits required by your county or even your locality. Of course, these vary greatly from region to region. In general, you should check with your state, county, and city to make sure your business isn’t operating without documentation required by any of these entities.
If you would rather hire someone to research your company’s license and permit requirements, there are plenty of service providers that offer business license research packages. When you purchase one of these packages, that company will determine which licenses and permits you need from each government entity, then provide you with the applications for each one. At that point, all you need to do is fill them out and turn them in.
5) Understand Requirements for Hiring Employees
If your business has employees, or if you plan on hiring employees at any point, you will need to set up income tax withholding on the federal level, and quite a few states have this requirement as well. This is a fairly simple step that doesn’t vary much from state to state, but you should still make sure you understand your state’s regulations.
It’s also crucial to determine whether your employees are legally able to work in the United States, as it is your responsibility as a business owner to determine if your employees are eligible for work here. To make sure your employees are indeed eligible to work in America, you will need to have them fill out the I-9 form for employment eligibility verification. In addition, your employees will need to provide you with documentation like a passport, driver’s license, social security card, etc.
Once you’ve hired employees, you need to report the hirings to your state labor agency. A related requirement is the displaying of employee rights and employer responsibilities in conspicuous locations at your place of business. You can acquire posters with this information on them for free, which are sufficient for complying with this aspect of federal and state labor laws.
Finally, you’ll also need to set up a payroll system. You have the option to keep track of payroll on your own, you can hire an accountant, or you can acquire a payroll service to assist you. No matter which option you choose, your payroll system will need to include paying employees, paying payroll taxes, and filing relevant tax forms.
6) Determine Your Ongoing Compliance Needs
While some business owners can become focused entirely on the daily operations of their companies, there’s a risk that you’ll overlook ongoing compliance requirements. If your business fails to live up to these responsibilities, you can lose your good standing with your state, you can be subject to significant fines, and you can even see the state officially dissolve your business.
The vast majority of states require that all businesses file annual reports to keep the state updated regarding several crucial aspects of your company. From your physical address to the identity of your registered agent to the makeup of your ownership group, the exact information included in these reports varies a bit from state to state, but generally includes at least those core aspects. Not all states require a report every year, as in some states you’ll only need to file a report every other year.
This is one area where LLCs are much simpler to operate than corporations, as the corporation as a business type has many more ongoing compliance requirements than a limited liability company does.
7) Follow Income Reporting Rules
We mentioned earlier that there are some income reporting requirements that must be adhered to, even if your LLC opts for pass-through taxation using the partnership model. Owners of single-member LLCs are required to report all profits and losses with their 1040 tax form, but the method for multi-member LLCs is a bit more complex.
For LLCs with more than one member, each member is required to report their share of the business income, as outlined in the company’s operating agreement. Unlike the single-member LLC though, a multi-member LLC also needs to file a tax form known as Form 1065 with the IRS. This document outlines the company’s financial situation over the past year, in order to help the IRS make sure everyone paid their allocated portion of the shared tax burden. In addition, the LLC needs to give each member a Schedule K-1 form, which indicates that member’s share of the profits and losses, and the member then needs to appropriately report this info on their 1040.
LLC members must also pay self-employment taxes, which include the employer and employee portions of both Medicare and Social Security. Each member is required to pay 15.3% of their net income from the LLC, up to the Social Security threshold of $128,400, after which that individual only needs to pay the 2.9% Medicare portion of self-employment tax.
One issue we run into far too often is that of entrepreneurs thinking that their legal responsibilities end when they finish forming their LLCs. While formation is obviously an incredibly important step in the business life cycle, it’s really just the beginning of your company’s compliance journey.
Each step outlined in this guide serves a vital purpose in keeping your business compliant. Acquiring a federal tax ID number (EIN) registers your company to pursue several crucial business activities, opening a business bank account helps keep your personal and business assets separate, licenses and permits allow you to operate in accordance to federal and local laws, and following employment law helps you and your employees stay on good terms with the government.
Finally, correctly reporting your income, adhering to all tax requirements, and filing reports at the appropriate time are all factors for ensuring your business remains in good standing.
We hope this article helped you focus in on the things you need to be doing to keep your business compliant. We wish you the very best of luck with your LLC, and in all aspects of your business future!