When you launch a new business, there are a thousand decisions that must be made. What will you call your company? What colors will you use for your branding and logos? How will you cut through the clutter of your industry, drawing customers into the fold?
And then there are legal decisions. One of the most foundational decision points of all is which legal structure you will choose for your business. For millions of small businesses across the country, including countless web hosting companies, the LLC represents the superior option. But why is that exactly? And what are the steps involved with starting an LLC?
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LLCs: What Are They? What are the Benefits?
Let’s start with some basics. Before you register your LLC, it helps to know what an LLC is and why it’s so beneficial to web hosting companies.
What is an LLC?
LLC stands for Limited Liability Company, and it’s one of the most popular legal structures for small and mid-sized businesses.
What makes the LLC unique is that, unlike Sole Proprietorships and Partnerships, it establishes a distinct legal entity. In other words, the LLC and its partners are separate from each other in the eyes of the law. As such, you can keep your assets and liabilities separate from your business assets and liabilities.
What are the Benefits of the LLC?
This introduces several essential benefits that can position your web hosting company for long-term success. For example:
- The separation between business and personal assets/liabilities provides personal wealth protection, shielding you and your family from creditors and litigation.
- LLCs have built-in tax flexibility, allowing you to report to the IRS on either a corporate or a pass-through basis.
- You also have a lot of wiggle room concerning how your web hosting company is managed; you can allocate LLC responsibilities and profits as you see fit.
For these and countless other reasons, the LLC format makes a lot of sense for fledgling companies looking to scale. And that certainly includes web hosting businesses. So what are the steps required for actually establishing your company as an LLC?
What are the Steps Required for Registering an LLC?
Regulations involving LLCs can be fluid from one state to the next. For example, the requirements to form an LLC in Florida can differ from the requirements in Texas or California. Having said that, there are a few basic steps that remain consistent across the board.
1) Choose a name for your LLC.
As you think about a name for your web hosting business, it’s important to think beyond just marketing and branding. Your business name can also have legal implications.
Specifically, LLCs must choose a name that is not already in use by an LLC in the same state. To help you determine whether the name you want is still up for grabs, most states provide some kind of online directory that you can search.
2) Name a Registered Agent.
By law, every LLC is required to have a Registered Agent. This can be an individual or an organization appointed to receive legal or tax documents on behalf of your business. Some states allow business owners to serve as their Registered Agents, but it is more common to hire a third-party service. In many states, Registered Agent services cost as little as $50 annually.
When choosing someone to be your Registered Agent, the most important consideration is selecting someone who has a physical mailing address in your state. A P.O. Box will not suffice!
3) File and pay.
As you can probably imagine, establishing a new legal entity requires you to file some paperwork. Specifically, registering an LLC involves creating Articles of Organization, and then filing them with your Secretary of State. You’ll also need to pay a filing fee, which can vary by state. Often, it’s less than $100.
What types of information should you include in your Articles of Organization? Most states require just the basics:
- Your business name.
- A summary of your business purpose/mission (for web hosting companies, this can be quite straightforward).
- A list of all of your LLC’s partners.
- The name and contact information for your Registered Agent.
4) Keep up with filing requirements.
Most states impose annual reporting requirements on LLCs. Fortunately, these requirements are usually very minimal. For example, you may simply need to provide your state with confirmation regarding your contact information and your Registered Agent. Additionally, you will need to let the state know if you change Agents, or if your Agent changes their contact information.
What about special LLC taxes and other fees? Presently, the only state to levy an annual LLC tax is California, where LLCs must pay a flat rate of $800 each year.
5) Position your LLC for long-term success.
There are several other steps that your web hosting LLC can take to prepare for long-term success. Though not legally mandated, the following steps are all very prudent and highly recommended:
- Create an Operating Agreement. This document is sort of like a rulebook, or constitution, for your LLC, outlining your internal procedures for recruiting new partners or dealing with a partner’s departure. An Operating Agreement can spare you from potential legal disputes down the road.
- Claim an Employer Identification Number. You can get your EIN from the IRS website; for US citizens, this number is free. You’ll need it to pay taxes and administer payroll.
- Set up a business bank account. To properly separate your business and personal assets, it’s best to have an LLC bank account that’s not connected to any of your banking or checking accounts.
For Web Hosting Companies, LLCs Make the Most Sense
Launching a new web hosting company can be exciting, but it also comes with a lot of important decision points. One of the primary decisions you’ll make is the type of legal entity you’ll choose. Consider the merits of the LLC format for your growing business.