Last Updated on April 22, 2023 by Ewen Finser
Are you looking to start a business in North Carolina? Do you have a blueprint of the activities you want to run and the customer segment that will benefit from your solution? Most people assume that these are the first steps to forming a business but forget an important one goes a long way in determining whether it succeeds.
What legal entity will the business run as?
A Limited Liability Company is the most popular legal structure for setting up businesses in North Carolina. It borrows the advantages of a smaller sole proprietorship or partnership and the larger corporations. Anyone looking to limit their liability for business debts and lawsuits should consider forming an LLC instead of the other legal business structures.
Overview of an LLC
An LLC is a business structure in the United States that protects owners from personal responsibility for the company’s debts or liabilities. The prominent “limited liability” feature is similar to a corporation, and the “flow-through taxation” feature is borrowed from a sole proprietorship or partnership. These are what make an LLC a hybrid legal structure.
State rules govern LLCs, and they vary from one to the other. The owners are called members. Most states have no restrictions on the entities that qualify as members of an LLC, and they could be individuals, foreigners, corporations, other LLCs, or foreign entities. Companies in select niches such as banking and insurance are not allowed to be members of an LLC.
Advantages of an LLC
LLCs give members personal liability protection. The owners are not in danger of losing their personal assets if the LLC gets into a lawsuit or runs into debt. Sole proprietorships and partnerships do not offer this protection.
According to the law, LLCs are independent entities that can enter into agreements, sue or be sued, and engage in other activities, which outlines the limited liability aspect. This protection can be breached if owners pierce the corporate veil. This happens if they mix personal and business finances or commit fraud through the company.
LLCs have a few options when paying taxes; a feature corporations do not enjoy. They are subject to flow-through taxation by default, where the LLC’s profits pass through to the owners’ returns and are taxed at an individual level. As a result, the LLC won’t have to pay any federal corporate tax, and the owners can avoid the double taxation loophole seen with corporations. LLCs can choose to be taxed as an S-Corp or C-Corp, depending on which status fits them best.
Simple to Form and Run
An LLC is easy to start. Most states, including North Carolina, have a digital process where anyone can apply to form one. Running one is easy since they are not required to meet multiple regulatory requirements like corporations.
LLCs offer owners more privacy compared to sole proprietorships and partnerships. LLCs are independent entities and can engage in activities without disclosing the members. Some states do not require LLCs to list members on the formation document, as you can list a manager instead. They can also hire a registered agent and have them receive official documents instead of using their address.
LLCs are flexible in multiple ways. In matters management, they can choose to be managed by a member or manager. For a scenario where members manage the LLC, they are actively engaged in the company’s day-to-day activities.
In a manager-run LLC, the members delegate the job of overseeing the everyday activities to a professional manager, who can be one of the members. LLCs do not need to have a board of directors.In matters of profit, LLCs can choose to distribute them as they deem fit. The default is using the amount of stake each member owns in the LLC, but additional distribution criteria can be included in the operating agreement.
Disadvantages of An LLC
LLCs do not allow for shares or stock like corporations. This makes it hard to transfer ownership stakes between members, especially if there are disagreements. If a member disagrees with the others on some issues, it is hard to remove them, which can lead to the dissolution of the LLC.
LLCs cannot handle profits the way corporations do. Corporations can hold profits and reinvest them into the business or distribute them as dividends. LLCs are required to distribute any profits to their owners or reinvest them back into the business every year. Corporations can carry over profits to the following year, even if they will be taxed at 21%.
Limited Fringe Benefits
People working for an LLC and receiving fringe benefits like group insurance, medical insurance, and parking must declare them as taxable income.
Restrictions on Certain Niches
Some types of business lines like insurance companies and banks cannot form LLCs. These restrictions also apply to professional services like law firms and doctors. The limited liability feature does not extend to these companies, and they must set up a Professional LLC instead. PLLC structures do not benefit from liability protection.
How To Form an LLC in North Carolina?
The process of forming an LLC in North Carolina is not different in a big way from the baseline used across different states.
1. Select A Name
The first step is picking a name that the LLC will go by. Under NC law, the name must contain the words “Limited Liability Company” or the abbreviations “L.L.C..” Other variations of the two like LLC, ltd liability co, limited liability co, and ltd liability company are also allowed.
The name should be unique, and no other LLC should be using it to conduct business in North Carolina. You can confirm this on the website of the secretary of state of North Carolina, which has a business name database. If a name you wish to use is available, you can reserve it for 120 days by filing an Application to Reserve a Business Entity Name with the secretary of state. This application is filed by mail and costs $30.
While this step is not mandatory, it might help register the LLC’s name as a state or federal trademark.
Note: When running business, you can use an assumed name called a DBA(Doing Business As) if you do not wish to use the LLC’s name.
To do this in North Carolina, register the assumed name with the county where your LLC does business. File the Assumed Business Name Certificate with the county register of deeds. A single application can do it for multiple counties. The cost for this is $26.
2. Get a Registered Agent
All LLCs in North Carolina must have a registered agent attached to them. This is an entity that receives official documents and communication on behalf of the LLC.
But why appoint an agent when you can receive communication through the LLC’s physical address?
The concept of a registered agent was enforced to ensure the authorities have a reliable way of communicating with your business. This requirement was mainly enforced because of lawsuits against LLCs. For a lawsuit against your company to proceed, your business must be notified first.
A registered agent is a reliable way of getting this communication across and ensures that the government can easily reach you. The registered agent may be another business entity registered to do business in the state. Today, you will find multiple companies in NC offering registered agent services and find a reliable one to enlist.
3. File Articles of Organization
This is the “application form” when forming an LLC and contains all the details about the company. Earlier, you would be required to create the document, but it has been transformed into an online form that can be filled on the NC secretary of state’s website. The document includes details like;
• The name of the LLC
• Names and addresses of the people forming the LLC
• Name and address of the registered agent
• The LLC’s physical address and contact details
• The effective date of the Articles of Organization
• Signatures of the members
If you do not fancy the online filing option, you can send it by postal mail. The cost is $125. However, applications filed online are approved faster compared to those sent through mail.
4. Draft an Operating Agreement
North Carolina does not require you to present an operating agreement for them to approve the LLC, but it is vital to ensure the smooth running of the company. It is the primary document that outlines the members’ duties, rights, liabilities, powers, and obligations. It is an internal document that is binding to the members. In a nutshell, it explains how the LLC will be run and how certain situations will be handled.
When forming an LLC, members might not anticipate conflicts which are often inevitable. It is not unheard of to find them in a stalemate where they cannot agree on the way forward, potentially compromising the existence of the LLC. These are the situations that should be preempted in the operating agreement so that everyone is clear on the rules of the house.
LLCs that do not create an operating agreement will be subjected to the default one when members hit a stalemate. The universal rules outlined in the UCCA are not favorable, and you would instead come up with your own.
All businesses need to comply with various requirements put in place by the authorities to run their activities smoothly.
First, get an Employer Identification Number. This is the number used by the IRS to identify the LLC for taxation purposes. An EIN is critical even if your LLC has no employees. Getting one is free on the IRS website. You will need this EIN when opening a business bank account.
Second, find out all the business licenses you need to get for the niche you operate in. Check with the clerk in the city your LLC is in for any local licensing requirements. Some specialized niches, such as medical services and law, require professional licenses for them to run.
Lastly, if you employ a few people or sell goods and collect tax, you must register with the North Carolina Department of Revenue. This registration can be done online on the DOR website.
6. Run Business and File Annual Reports
Once the LLC is approved and is compliant, run the business and ensure that you file annual reports with the NC Secretary of State. They are due for the year in which they are filed. In simple terms, an LLC formed before the 15th of April owes a report for that year. Those created after 15th April do not have to file the report until the next 15th of April.
Question: Can foreign LLCs do business in North Carolina?
Answer: Yes, foreign LLCs can operate in North Carolina if they comply with a few requirements.
First, they must register with the North Carolina Secretary of State. They can do this by filing an Application for Certificate of Authority For Limited Liability Company online or by mail. The application costs $250.
The application should be accompanied by a certificate of good standing from the home state where the LLC is based, dated no more than six months old.
For approval, ensure that the LLC’s name is available in North Carolina. If it is taken, the LLC should adopt a DBA for use in the state.
Question: How much does it cost to form an LLC in North Carolina?
Answer: The Secretary of State in North Caroline charges $125 for filing the Articles of Organization.
To reserve a name, you will pay $30 for instances where you must do it for some time before you finally file the Articles of Organization. If you are ready to file and the name is available, do not pay this amount and quickly move to claim the name and file the application to have the LLC formed.
Today, you can apply to form an LLC yourself, thanks to the digitized procedures that have eliminated paperwork and all the complexities associated with it. However, you can hire an expert and have them do the entire process for you at a fee.
Question: How long does it take to form an LLC in North Carolina?
Answer: A North Carolina LLC is approved in seven to ten business days for regular filing. Expedited filing options are 24-hour processing at an extra $100 and same-day processing at an additional $200. Once the LLC is approved, you will receive an email with the stamped and approved Articles of Organization.
How to Form an LLC in NC: Bottomline
Forming an LLC in North Carolina is not hard. The universal procedure for creating one applies in this state as well, and if you follow them and give the correct information, you should have the approval within ten business days. You can opt for the expedited option and get it within the same day if you have the money. Avoid any inconsistencies with the application to avoid delays or instances where the application is rejected.