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Business Update: US State Laws Explained

During August, 2021, the U.S Census Bureau found that the Northeast of the country had seen 65,834 business formation applications. Of those, 7,324 were indicated as having “planned wages.” While LLCs remain a popular choice for entrepreneurs, each state may have different laws when it comes to business formation. 

Why Choose the LLC?

Entrepreneurs establishing their business as an LLC benefits from a distinct advantage, as the LLC essentially lets the entrepreneur separate personal assets from the business. This allows their personal property to be protected from business consequences. In certain situations the LLC also lets the owners/members avoid the prickly issue of double taxation which takes place with corporations. Furthermore the LLC provides a simple, more formal structure for business that is relatively easy to create. 

Standard Rules For LLCs

While LLC rules may vary by state, a few standard rules apply irrespective of the state that the LLC is formed in. Researching state requirements for LLCs in any specific state can be a time-consuming activity. Fortunately, online resources such as The Really Great Information Company (TRUiC) takes an in-depth look at LLC laws by state which entrepreneurs can refer to. 

Generally speaking, LCCs only require one member to get started, omitting the need to first create a board of directors or having a partner. It’s usually best to form your LLC where you live, but there may be circumstances where it would be best to form it in a different state. In general, if a member leaves the LLC has to be dissolved, then the remaining members can form a new LLC. For those who plan to hire employees, the LLC must obtain a federal tax ID number, or Employment Identification Number (EIN) from the IRS. Lastly, in most states the LLC will need a registered agent. 

LLCs and Tax Questions

LLCs that have only one member would file taxes as a sole proprietor. If the LLC has more than one member, each member would file their own tax returns. Form 1065 to report profit and loss would be used in this case. LLCs can elect to file taxes as a corporation, in which case the appropriate return must be filed. Generally, one of the few disadvantages of the LLC structure has to do with self-employment tax that its members need to pay. 

Liability Protection

One of the primary reasons for forming an LLC could be that it offers liability protection. Members are only risking the assets they contribute to the business, but their personal assets are not subject to seizure in the event a lawsuit is filed against the business, or as a result of outstanding debts. LLC members may share business profits however they see fit, irrespective of what percentage each member has contributed to the business assets 

Requirements for Operating Agreements

When forming an LLC, some states require an operating agreement. These states include: California, Delaware, Maine, MIssouri and New York. Let’s take a closer look at some. .. 

California: In this state the operating agreement may be either oral or written. Written agreements must be kept with the other records of the company. 

Delaware: LLCs are required to have an operating agreement, but it may be done at any time. It does not need to be written and can be oral or even implied. Maine has similar requirements to Delaware in this regard. 

New York: LLCs will need a written operating agreement here. The agreement should include information on the LLC’s business and responsibilities of its members along their rights, preferences and limitations. 

A Last Note on Registered Agents

A registered agent is a person or business entity that accepts legal and tax documents on the LLCs behalf. Also known as a resident agent or statutory agent, most states require LLCs to have and maintain a registered agent. 

LIke all business structures, the LLC is governed by state. Some states are progressive and comprehensive in their laws governing LLCs, whereas others may have different requirements. It’s always best to check what the state laws are when embarking on a new business venture.