If you want to do business using an LLC, you will need to open a business bank account. Having a separate bank account for your LLC is required to protect your personal assets from business liabilities. Savvy entrepreneurs know they should never mix personal funds and accounts with company assets, so it’s important to know how to open a bank account for an LLC.

The process for opening a business bank account  can differ depending on which bank you are using and even the branch you go to. Non-US residents will also have to make some additional considerations when opening a bank account for an LLC.

Here we cover how an LLC can open a bank account and what documents may be required.

 How To Open a Business Bank Account for an LLC

The process for opening a business bank account for an LLC is not completely standard. Banking laws differ in each state, and separate banks have different policies for opening business accounts. Policies can even differ between separate branches of the same bank. Some branch managers understand LLCs better than others and may require varying amounts of documentation.

Although policies differ between banks, the following steps are generally required to open a business bank account for an LLC:

Step 1.) Form an LLC

Opening a business bank account starts with forming a business entity, like an LLC. Many business owners prefer LLCs because they are easy to both setup and manage.

Forming an LLC requires filing a formation document with the Secretary of State’s office. This document has different names in different states. Delaware, one of the most popular states for forming LLCs, calls the formation document a “Certificate of Formation”. Other states call the LLC formation document the “Articles of Organization”.

A Delaware Certification of Formation requires the name of the company as well as the name and address of the company’s registered agent.

Step 2.) Obtain an EIN Number

An LLC needs to obtain an EIN number from the IRS in order to open a business bank account. LLC Members must provide the bank with a copy of either the EIN Confirmation Letter (575 CP) or an EIN Verification Letter (147C) from the IRS in order to open the account. Federal law now requires even single member LLCs to obtain an EIN number.

An EIN, or “Employer Identification Number”, is the type of federal tax identification number assigned by the IRS to businesses, estates or trusts. An EIN number works like a social security number for a business entity and allows LLCs to pay federal taxes, do payroll and open bank accounts.

LLC owners can obtain an EIN number by submitting the Form SS-4 to the IRS either online, through the mail, or via fax. You do not have to submit the Form SS-4 on your own. Service providers, like IncNow, can submit the SS-4 application to the IRS and obtain an EIN for your LLC. Note that you should not obtain an EIN for an LLC until after the LLC is formed.

Step 3.) Provide Necessary Documents

A bank will require some supporting documentation in order to open an account for an LLC. Banks require proof that:

A.) The LLC legally exists; and,

B.) The individuals trying to open the account are authorized to act on the LLC’s behalf.

Banks typically require the following documents to open a business account for an LLC:

• The LLC Operating Agreement

Most banks will want to see a signed copy of the LLC Operating Agreement in order to open a business account. The LLC Operating Agreement lists the owners and managers of the LLC.

• Certificate of Good Standing

A Certificate of Good Standing is an official document that an LLC can obtain from the Secretary of State in its state of formation. Some states also call this document a “Certificate of Existence”. The Certificate provides proof that;

A.) The LLC legally exists; and,

B.) The LLC has paid its franchise tax balance and is compliant within its state of formation.

If you have a Delaware LLC, you can obtain a Certificate of Good Standing through a registered agent, such as IncNow.

• Statement of Organizer

In some instances, a bank may require additional documentation showing that the people listed in the Operating Agreement are actually connected to the LLC. One option is to provide a Statement of Organizer.

A Statement of Organizer is a corporate document stating that an Authorized Person requested the LLC to be formed while acting as a representative for the company’s initial Members. A Statement of Organizer can help certify who the initial Members of an LLC are intended to be at the time the company is formed.

• Other Public Filings

Some banks outside the United States may find that internal company documents are not enough to prove ownership in an LLC. In this case, a bank may request a copy of an official public filing stating the names of the LLC’s owners.

Some LLCs can simply provide the bank with a copy of the company’s formation document filed with the Secretary of State. Many states require LLCs to include the names of the company’s Members and Managers in the public formation document.

This can be problematic for Delaware LLCs however. Delaware does not require the names of LLC Members to appear on the company’s Certificate of Formation. Most Delaware LLC owners take advantage of this and protect their privacy by not including their names on the formation document.

Delaware LLC Members can file an amendment to the LLC’s Certificate of Formation with the Delaware Secretary of State to include an article providing the names of the company’s owners. Amending the Certificate of Formation creates an official public record of an LLC’s Membership that should satisfy almost any bank.

What is an LLC Bank Account? 

An LLC bank account is a business bank account opened specifically for a Limited Liability Company (LLC). Opening a separate bank account is an important part of setting up a business as an LLC. 

Business bank accounts provide many benefits for LLCs and its Members. The primary benefit of an LLC bank account is the liability protection it offers. LLC Members need to make sure that they are not mixing personal and business finances in order to maintain their limited liability shield in the company. Opening a separate bank account for an LLC can make it easier to avoid commingling funds between a business and owners. 

Opening an LLC bank account can also assist with accounting. Having a separate business account can make it easier to track any expenses, deposits and transfers related to a business. This clarity will help during tax time, and is crucial if the company needs to complete a financial audit. 

LLC bank accounts may come with certain features that personal accounts don’t. These may include higher transaction limits, merchant services, business credit cards and more. These benefits can help give your company’s finances a boost depending on what kind of business you are in. 

Do I Need to Open a Business Bank Account for My LLC?

Yes, you should always open a separate business bank account for your LLC. An LLC does not need its own bank account to conduct business. However, keeping business finances separate from your personal bank accounts is an important part of operating an LLC the right way.

The point of forming an LLC is to legally separate yourself from your business to protect you from being personally responsible for any debts or obligations incurred by the company. These legal protections are called “limited liability protection”.

You can lose your limited liability protection if you start mixing business income and expenses into your personal finances. The best way to legally protect yourself and your business is to open separate business bank accounts for your LLC.

What Should I Use My LLC Bank Account For?

It is important to remember that an LLC bank account should only be used for depositing business income and paying business expenses. Your personal finances should be completely separated from any bank accounts associated with your LLC.

Mixing personal finances with business bank accounts is called “commingling”. If LLC owners or Managers are found to be commingling business assets or funds with personal bank accounts, the whole company could lose its legal protections. This puts the LLC Members at risk of being held personally responsible for the company’s legal liabilities and financial obligations.

A business owner can pay themselves through either a salary and bonuses with payroll deductions or through simply withdrawing LLC funds as an owner’s draw. Either way, all of these will be subject to self-employment taxes. To reduce self-employment tax in half, most LLC owners are eligible to file an IRS Form 2553 to have their LLC classified as an S-Corporation for tax purposes. Then, the owner’s income can be split 50 / 50 between salary and S-Dividend (not subject to self-employment FICA taxes like Medicaid and social security contributions).

Where Can I Find My EIN Number?

The first place to look for your company’s EIN number is the original EIN Confirmation Letter. You can also find your EIN number recorded on numerous company documents and records. These include:

• Old federal tax returns,
• Business bank account statements,
• Official IRS tax notices,
• Business license, permits, or other applications.

If you cannot find your EIN number on any relevant documents, you can call the IRS and request an EIN Verification Letter.

Keep in mind that you will need access to a fax machine in order to receive an EIN Verification Letter. The IRS can provide you with the Verification Letter right away, however, they can only send it through fax.

Do I Need a DBA to Open an LLC Bank Account?

An LLC does not need a DBA to open a business bank account. Bank representatives who are unfamiliar with LLCs may think that the company needs a DBA to open an account. This is not the case.

A DBA stands for “Doing Business As”. A DBA is an alternative name that an LLC can use for business purposes other than its official corporate name. DBAs are also referred to as “fictitious names” or “trade names”. For example, Agents and Corporations, Inc. trades under the name “IncNow”. An LLC can acquire a DBA by filing a document at the county level in its state of formation.

Can A Non-US Resident Open an LLC Bank Account?

Individuals from almost any country in the world (except restricted countries and individuals on prohibited lists) can form an LLC in the United States. Non-US residents who form LLCs likely need to visit the US in order to open a business bank account. Non-US individuals often decide to open a business bank account in the state where the LLC is formed.

Regardless of where you do business, you will find having a bank account for your LLC to be essential. Once your company is formed, you can obtain documents later that your bank requests if you do not have them at the time of formation.

What LLC Documents Do I Need to Open a Business Bank Account?

Your business will need to open a bank account to conduct business. Beyond the Certificate of Formation which is filed with the state of formation, the banks will require your operating agreement and an EIN. The Employer Identification Number (EIN) can be obtained directly from the IRS, or through IncNow’s EIN service. Under the US Patriot Act, banks also need to comply with Know Your Customers (KYC) laws. Therefore banks require a list of the LLC’s owners and managers including their driver’s license or passport. Often when your bank branch is not located in the state where your company was formed, banks may request that the LLC submit a Certificate of Authority to qualify as a foreign entity in the state where the business has its operating headquarters. One thing to be aware of is that if you open an LLC in Delaware and decide to open the bank account from a branch in Delaware, then Delaware law will govern that bank account. This can be advantageous because Delaware is the only state in the country where a business creditor cannot garnish funds in the business’s bank account to collect on a judgment. (10 Del.C. § 3502).

Do I Need to Open a Bank Account for an LLC in Person?

Typically, United States residents must open a bank account for an LLC in person to satisfy the Know Your Customer laws and Patriot Act. If you want to open a Delaware bank account without visiting Delaware, it may be possible to visit a branch of the same bank that is local to you or your business to confirm your identity. Non-U.S. residents should contact their local bank to see if it has a correspondent bank in the U.S. to assist.

What Happens After I Open a Bank Account for an LLC?

After you open a bank account for an LLC, you must implement proper accounting procedures for tracking all money coming in and going out of the business account. Keeping thorough records of all business transactions will make tax season simpler and will further separate personal assets from business liabilities. Commingling personal expenses and assets with business assets could result in loss of liability protection for disregarding formalities.

NEXT –> How To Save On Single Member LLC Taxes

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You may have seen the “Circle B” logo, but what does it mean? The logo can only be displayed by a Certified B Corporation. These are companies that have achieved a minimum score on an evaluation of their corporate governance, community, employee, and environmental benefits. Here’s what you need to know about this entity.

What Is a Certified B Corporation?

Certified B Corporations are for-profit entities that exhibit world-class standards for sustainability, transparency and accountability. These standards are audited periodically by the independent industry standard organization, B Lab. 

B Corp Certification can be likened to Fairtrade or USDA organic certification for products such as bananas or milk. The difference is that the certification looks at a company as a whole rather than just a single product. According to Juan Pablo Larenas, Executive Director of B Lab Global, “The B Corp Certification does not just evaluate a product or service; it assesses the overall positive impact of the company that stands behind it”. 

B Lab issues the B Impact Assessment, a free online tool that any company can use to assess its social and environmental performance. The assessment is scored out of 200 points. The average score for companies who complete the assessment is between 40 and 60 points. Certified B Corporations however are required to maintain a minimum verified score of 80 or above. Companies are able to compare their scores and share resources to help improve their score over time. 

The B Impact Assessment is a strict evaluation assessing a company’s overall impact on their workers, community, customers and environment. This holistic look at a company certifies a certain level of compassionate capitalism. Certified B Corps signal to potential customers and partners that they value stakeholder primacy over profit maximization. Increasing numbers of investors and customers now seek out companies that demonstrate sustainable business practices. 

B Corporation Requirements

1. Verified social and environmental performance. By maintaining their minimum B Impact score of 80 and submitting triennial assessments, Certified B Corps undergo a rigorous process to have their standards independently verified. 
2. Transparency. Certified B Corporations are required to share their B Impact Score publicly on bcorporation.net. 
3. Accountability. Many Certified B Corporations have adopted various legal structures which require them to consider their impact on all stakeholders of the company. These structures include traditional LLCs and corporations, as well as public benefit corporations and public benefit LLCs. 

How to Form a B Corporation

The first step of the B Corp application is to complete the B Impact assessment. Companies are required to have a minimum score of 80 in order to achieve certification. Companies must then maintain their passing B Impact score and recertify every three years. 

Becoming a B Corp is not simply a “participation trophy”. B Lab audits an applicant’s business practices, which is often a seven month process. It entails the initial 216 question application, the production of corporate documents and a series of interviews. Certification requires a company to open its books, goals and overall purpose for complete assessment based on standards set by the trained professionals at B Lab. Certified B Corps need to prioritize and disclose their impact to ensure continued progress toward their social, environmental and governance goals.

The rigor associated with B Corp certification distinguishes companies that make a real impact from those just with good marketing. Applying for B Corp status may not result in more business initially. Companies pursuing this certification look to legitimize their commitments to sustainability. 

The New “B Economy”

As the number and popularity of Certified B Corps has grown, so has their influence over other companies. The “B Economy” represents the greater community surrounding B Corps. This includes the more than 40,000 companies that have used the B Impact Assessment to improve their social and environmental performance, the millions of customers who buy from and support sustainable businesses, and the increasing number of investors seeking to invest in Certified B Corps. 

According to B Lab, over 120 venture capital firms have invested more than $2 billion in Certified B Corporations. The prevailing theory amongst these firms is that producing stakeholder value will produce the best financial returns. 

Although the B Corp movement started in the United States, it has spread all over the globe. There are now more Certified B Corps based outside of the United States than inside. Large multinational companies are beginning to adopt and promote B Lab standards throughout their global operations. In 2017, the French multinational Danone announced its intention to become the first Fortune 500 company to achieve B Corp certification. The company has already helped several of its subsidiaries achieve B Corp status. As of 2018, Danone has nine subsidiaries that are now Certified B Corps. 

The emergence of the B Economy is an exciting development. It means that anyone can participate in the broader movement to conduct business in a way that is best for profits and for the world. Certified B Corps represent a global community of leaders that benefit from increased credibility and trust. This enables them to attract more talent and promote better employee engagement.

IncNow: Delaware’s First B Corp

In May 2019, IncNow became the first incorporation service worldwide to be a Certified B Corp, and the first Certified B Corp in the State of Delaware. IncNow’s shareholders and directors approved an amendment to its corporate charter to declare its public benefit purposes, making them part of its governance structure. The company dedicates five percent (5%) of annual gross profits to support the environment, education, entrepreneurship and the arts in the greater Delaware Valley.

Examples of IncNow’s involvement in preserving and remediating the environment include its commitment pro bono clean water advocacy. The company is also involved in the leadership structures of the Delaware Natural Areas Advisory Council and the Christina Conservancy. It has also sponsored watershed cleanup initiatives and conservation in Delaware’s nature preserves. 

IncNow stands out even amongst Certified B Corps, earning the Best for the World award in corporate governance. Companies receiving the Best for the World honor rank in the top 5% of all B Corps worldwide for their impact in specific areas included in the B Impact assessment. Examples of IncNow’s award-winning governance include sponsoring athletic competitions for employees and company sponsored trips to destinations such as Portugal, Hawaii, Iceland, and Netherlands.

Pros and Cons of Forming a B Corporation

Forming a B Corporation also known as a Public Benefit Corporation (PBC) offers a unique business structure that allows the management to take into consideration stakeholder interests in the mission locked public benefit purpose that may not maximize the value to stockholders. To customers, employees, community and investors, it shows a commitment to certain social and environmental objectives. However, like any business decision, there are both pros and cons to consider. Here’s a breakdown:

Pros of Forming a B Corporation

1. Credibility and Trust:

Beyond simply incorporating as a PBC (or public benefit LLC), often these businesses seek out third party validation that they really are doing good. For example the gold-standard of this certification process is by a third party service, known as B-Lab at BCorporation.Net. B Corp certification is widely recognized as a symbol of commitment to social and environmental performance, making it easier for customers and investors to trust your business.

2. Attracting Purpose-Driven Customers:

Many consumers prefer to support businesses that are socially and environmentally responsible. Being a B Corp helps your company appeal to this growing market of conscious consumers.

3. Access to a Like-minded Network:

As a certified B Corp, your business joins a global community of purpose-driven companies, providing opportunities for collaboration, partnerships, and sharing best practices.

4. Employee Satisfaction and Retention:

Companies that focus on a broader mission than profit often attract employees who are passionate about making a positive impact. This can lead to higher employee engagement, satisfaction, and retention.

5. Legal Protection for Mission:

B Corps are legally able to consider the impact of decisions on stakeholders (not just shareholders), which helps protect the company’s social mission, even if owners think that decision is wasting potential corporate profits.

6. Attracting Impact Investors:

B Corps often have access to a broader pool of investors who are looking to make a positive impact, in addition to earning a financial return.

7. Marketing and Brand Differentiation:

B Corp certification can serve as a unique selling point, helping to differentiate your company in a competitive market and appeal to consumers who prioritize social and environmental responsibility.

Cons of Forming a B Corporation:

1. Costs and Time Commitment:

Certification involves application fees and costs for the required assessments. It can also be time-consuming to gather the necessary documentation, which may involve dedicating significant internal resources.

2. Rigorous Standards:

B Corps must meet high standards across various aspects of the business, including governance, workers’ rights, environmental impact, and community engagement. Maintaining compliance with these standards requires continuous effort.

3. Ongoing Reporting and Recertification:

B Corps must complete recertification every three years, which requires ongoing transparency and updating of practices. This can be a significant administrative burden. Additionally a Delaware PBC must report to its shareholders every other year on how it is advancing the public benefit mission.

4. Potential for Public Scrutiny:

Because B Corps are committed to transparency, they can face public scrutiny if they fail to live up to their standards, which can damage the company’s reputation.

5. Limited Focus on Financial Performance:

While B Corps balance social impact and financial performance, some investors may prefer a stricter focus on profitability, potentially making it harder to attract traditional venture capital or certain financial backing.

6. Complex Governance Structure:

Companies must integrate social and environmental goals into their legal structure. This may require changes to the company’s bylaws, governance documents, or operating procedures, which can be complex and challenging to implement. For example the B Corp must consider their Greenhouse Gas emissions through direct and indirect activities. This is not just a smokestack that emits carbon dioxide, but also considers the commute of employees to an office.

7. Limited Global Recognition:

While B Corp certification is growing, it is not universally recognized across all regions or industries. In some markets, it may not carry as much weight or may be less relevant to customers who just want to get the lowest price without concern about negative externalities, built into the products and services being consumed.

The post What Is a Certified B Corporation? appeared first on IncNow.

If you have ever tried to rent an apartment or lease a vehicle, you are probably familiar with the personal credit system. Your Social Security Number is attached to credit reports generated by major credit bureaus. Potential lenders then use your credit score to assess your ability to borrow money. Much like how a Social Security Number is connected to your personal credit profile, a DUNS Number provides a credit profile for your business.

But what exactly is a DUNS number, and how does it work? We cover the ins-and-outs of the DUNS system and how establishing a credit profile can help your business. We also address how the federal government has moved away from the DUNS system for the purpose of awarding government contracts.

What is A DUNS Number?

DUNS stands for the “Data Universal Numbering System”. The DUNS Number was created by data services company Dun & Bradstreet (D&B), and is designed to mimic the personal credit reporting system but for commercial businesses. Lenders widely recognize the system as the universal standard for establishing the creditworthiness of companies.

Much like credit scores in the personal credit system, the DUNS generates a “Paydex score” for each company. D&B evaluates the borrowing behavior of a company and assigns a Paydex score running from 0-100. A score of 75 or greater is considered to be good credit. This is similar to a credit score above 730 in the personal credit system.

 Do I Need A DUNS Number?

Using a DUNS number to build a credit profile for your business can be beneficial whether you are a large multinational corporation or a small mom and pop shop. A high Paydex score can help you secure larger loans. This is ideal if your company requires substantial amounts of operating capital to either support its business or to expand.

Commercial credit can also be useful for small businesses and sole proprietors. A company with a solid Paydex score may be able to assume assets under the name of the business without requiring personal guarantees from its owners. In a way, this allows owners and managers to maintain separation between their personal assets and the creditor liabilities of these businesses.

How Do I Get a DUNS Number?

To get a DUNS number, you first must form your company as a legal entity in a US state of your choice. Entity options include LLCs, corporations, limited partnerships, and others. After establishing your business entity, you can contact Dun & Bradstreet to request your number for free.

To obtain your DUNS number, D&B will require specific information regarding your business entity. This includes the following:

• The entity name;
• Formation date;
• State identification number or filing number;
• Nature of the business;
• Number of employees;
• And the Employer Identification Number (EIN).

To obtain a DUNs number, a company must disclose specific information about its beneficial owners. Some states, like Delaware, do not require this information on any of the incorporation documents that are filed with the state. The DUNS Number application requires the names, phone numbers and addresses of all beneficial owners. D&B will independently verify the information by contacting whomever is listed as the ultimate beneficial owner. After verifying that all necessary information is correct, they will issue the DUNS number for the entity.

Changes to the DUNS System

In the past, the federal government required all public and private entities to have a DUNS number in order to bid on government contracts or apply for grants. As of April 4, 2022, the government will move away from the DUNS system. The Unique Entity Identifier Number (UEI) will take its place.

The UEI system is more centralized and avoids making companies go through a non-governmental organization to acquire a credit identifier. The federal government has tasked the General Services Administration (“GSA”) with managing the new UEI system. The GSA claims to have generated cost savings through competition by having Ernst & Young (EY) and D&B bid against one another for providing credit reporting services. The agency ultimately assigned the contract to EY. The goal is to create a more sustainable process without the need to transition again in the future.

How Do I Get A UEI Number?

The government administers Unique Entity Identifier Numbers through the System for Award Management website. You can visit SAM.gov to obtain a UEI for your business. Note that if you have already registered your company in SAM.gov, it will already have an existing UEI number.

The existence of the UEI does not completely remove the need for a DUNS number. Commercial lenders and vendors still use the DUNS system and Paydex score  to assess the creditworthiness of commercial entities and enable them with better access to credit.

UEI vs. DUNS Number

A Unique Entity Identifier (UEI) is the business ID number used in the SAM.gov portal for US federal government grants and contracts. If your business is seeking a grant from the federal government, it will first need to register with the System for Award Management (SAM). UEI replaced the Data Universal Numbering System (DUNS) as the primary ID under the US federal government. What people call a “DUNS number” refers to a nine-digit unique number created by a private company known as Dun & Bradstreet, which is similar to a credit rating agency for business entities. Unlike the DUNS number, the UEI is not owned by a third-party private party. The UEI was designed to simplify the process of conducting business with the US federal government.

The post What is a DUNS Number and Do I Need One? appeared first on IncNow.

“Can I see your evidence of filing?” That is what the banker said when I went to open my business account. The banker then said can I see your “articles?” How about the “proof” your company was formed? These terms are all synonymous. 

Banks need certain documents for “know your customer” law compliance under the Bank Secrecy Act. The most fundamental is the public document filed with the secretary of state, like the birth certificate for your company. Many entrepreneurs unfamiliar with this industry jargon would benefit from learning certain business formation terminology.

Lack of Business Formation Vocabulary in Education

It is not surprising that in high school and college, students never learn the vocabulary of incorporating new businesses. What is surprising is that business formation vocabulary is not even part of the curriculum in law schools or business schools. Moreover, entrepreneurship classes breeze past key distinctions in the vocabulary of forming a business.

With the newly enacted Corporate Transparency Act (CTA), it is more important than ever for new entrepreneurs to understand certain business formation mechanics, especially terms that go into calculating the deadline for complying with the CTA.

Corporate Transparency Act (CTA) Deadlines

Importantly, new businesses formed in 2025 only have 30 calendar days to file their Beneficial Ownership Information Report (BOIR) with FinCEN. Many incorporation service companies will tell you this 30-day clock starts on the date of formation. While this may be an easy point in time to reference, the actual clock often starts later by a day, a week, or even a month depending on how slow the secretary of state processes your new company filing.

The Financial Crimes Enforcement Network (FinCEN) balances the need to disclose important actors hiding behind opaque corporate structures with the practical realities of the vast majority of unsophisticated legitimate business operators. FinCEN understands some states take weeks to approve a new company’s formation certificate before the entrepreneur knows the business has been formed.

Why Does a Company Need to Be Reviewed Before It’s Formed?

Not all new company filings get approved. The Secretary of State may suspend or reject a filing for not meeting minimum statutory filing requirements. For example, the corporate name may conflict with another name or certain checklist items could be missing, such as the number of shares of authorized stock and par value.

FinCEN’s Approval Date and Its Implications

FinCEN announced that it would use the date of approval to start the 30-day clock rather than the date of filing. The approval date is the sooner of (1) the day the secretary of state returns the “evidence” of formation to the service who initiates your new company filing request to the secretary of state or (2) the day your company first appears on the state’s public records website if a search were to be conducted of businesses registered in the state.

The challenge with using the approval date rather than the filing date is that the date of approval cannot be easily ascertained in hindsight by a public records review.

What Are The Penalties For Missing the CTA Deadline?

New companies formed in 2025 and thereafter only have 30 calendar days to file after the approval date. You will want to avoid $606 daily fines for each day after the deadline that the BOI report is late up to $10,000 per violation plus up to 2 years in jail for willful noncompliance.

Definition of Evidence Under the CTA

What Is Evidence Under CTA?

The courtroom definition of “evidence” should be distinguished from “evidence” in the context of company formation. When a lawyer or entrepreneur wants to form a business, they need to submit a government filing to officially create the company. For example, if this were an LLC, the document is usually called a Certificate of Formation or Articles of Organization, depending on the terminology used in the state statute where the company is formed. 

This “evidence” document is usually one page long. The evidence contains a stamp showing the filing date as the formation date. That represents the date the filing was sent to the secretary of state’s office for review and approval. Upon approval, the filing office affixes an electronic stamp with the date and time of filing and a unique state filing ID number. 

Once the stamp has been affixed, only at that time does the document get often referred to as the “evidence of filing”. It is “evidence” because it proves when the new formation has become a company allowed to do business. In other words, on the approval date, the formation date is “backdated” to the time of filing, retroactively bringing the company into being a legal person. 

Banks and lenders request to see this “evidence” before they open a bank account or transact significant business to ensure the company formation process was initiated successfully. Nevertheless, that first step is not the last step in due formation. For example, an LLC also has a private agreement known as an LLC Operating Agreement required to outline ownership and management. 

By comparison, a corporation has private documents consisting of bylaws, minutes, and stock certificates that must be properly issued for a corporation to be duly incorporated.

What Role Do Filing Service Companies Play?

Filing service companies receive and forward the evidence approved by the state to their customers. Service companies typically also help provide template operating agreements for an LLC. The evidence and internal template documents are delivered to its customer who ordered the company formation. 

While it is common for service companies to deliver the evidence the day it is received back from the secretary of state, sometimes that evidence is sent from the filing service company to the customer a day or more later. No record from the secretary of state or online identifies the day the state approved a filing. 

Similarly, the list of companies on the public registry does not show the date of approval, only the date of initial filing. This is why it is so challenging for entrepreneurs to determine exactly the date when the company filing was approved to start the 30-day clock. Again, the evidence only shows the date the company was submitted to the state. No record exists of the date when the secretary of state lists the company on its public registry.

How To Avoid Penalties for Late BOI Reports

Each day following the first 30 calendar days from approval, $606 daily fines accrue, a federal penalty late fee of up to $10,000 total per violation. Under the CTA, almost all companies are required to file initial Beneficial Ownership Information reports with FinCEN. 

Knowing when your filing was approved would be helpful in defending late fee penalty cases should an enforcement action arise. Entrepreneurs are left not knowing when the 30-day clock starts. Therefore, the best practice is not to wait more than 30 days past the date of filing with the secretary of state. Relying on the date the company was first listed for approval could create an evidentiary problem during an enforcement action.

30-Day CTA Trigger Date Timeline

1. A business owner sends an order to a filing service to form their company.
2. The filing service prepares and signs formation filing document
3. The filing service starts the process and submits the filing to the Secretary of State.
4. The Secretary of State approves new company filing and the company name appears on the public entity record. 
5. The Secretary of State’s office forwards the filing service with evidence of approval of new company filing.
6. The filing service forwards the evidence of filing and other company documents to the business owner.
7. The business owner obtains an Employer Identification Number (EIN) from the IRS
8. The business owner files a Beneficial Ownership Information Report (BOIR) with FinCEN to comply with the Corporate Transparency Act within 30 calendar days of when evidence was approved for companies in 2025. 

For companies formed in 2024 and before January 1, 2025, within 90 days of the date of evidence approval. For companies formed in 2023 and earlier, the initial BOI report must be filed by December 31, 2024.

Top Benefits of Understanding Business Formation 

Prior to the enactment of the CTA, entrepreneurs could simply rely on service companies to handle the mechanics. Back then, entrepreneurs did not have a need to know the process any more than someone buying a new home does not need to know every step in designing and building their home. 

While knowing how your home’s systems work can be handled by contractors, the same may not be advisable when it comes to business formation. Examples abound of the benefits of knowing the internal affairs of the structure of your business, such as how an LLC’s operating agreement is structured. 

Likewise, knowing the need for a shareholder agreement in a corporation is useful when wanting to keep your business partners from destroying what you have built.

How to Find Your Company Formation Filing Date

If you are unsure of the date when the secretary of state approved your company formation filing, you can ask your filing service company when the secretary of state in your state of incorporation returned the filing to their office. However, in the absence of knowing when your company name first appeared on a public records database using the date of formation is a safe bet.

Additional Business Steps Not Relevant under CTA

• Date EIN applied for or obtained (although the number is required for CTA filing)
• Date filing service subsequently sends formation documents to customers by email or physical mail
• Date business license obtained
• Date bank account opened
• Date internal business documents signed
• Date business transactions start
• Date company acquires assets

The post What Is Evidence In Business Formation? appeared first on IncNow.

The Internal Revenue Service (IRS) uses several different types of identification numbers for individuals and businesses. Most U.S. citizens are familiar with Social Security Numbers or Employer Identification Numbers, however, not everyone knows about the other types of federal tax ID numbers.

In this article, we discuss Individual Tax Identification Numbers, or “ITINS”. We breakdown what ITINs are, how they are used, and how they relate to Employer Identification Numbers (EINs). 

What Is An Individual Tax Identification Number (ITIN)?

Individual Tax Identification Numbers, or ITINs, are a type of unique tax ID number assigned by the IRS to individuals who need to pay taxes in the United States, but who are not eligible for a US Social Security Number. 

People who are typically eligible to obtain ITINs are either resident or nonresident aliens in the U.S., or their spouses and dependents. The IRS does not allow individuals who are already eligible for a Social Security Number to Receive an Individual Tax Identification Number. 

What Is An Individual Tax Identification Number Used For?

Individuals can use ITINs to pay taxes for income that they earn in the United States. This income can be earned through employment, or by doing business as a sole proprietor or a single-member LLC. 

Although an Individual Tax Identification Number does allow you to pay U.S. federal taxes, an ITIN does not provide access to Social Security benefits. 

Does An ITIN Allow You To Work In The U.S.?

No, having an ITIN does not authorize an individual to be able to work in the U.S. An Individual Tax Identification Number is different from a U.S. work permit or Employment Authorization Document (EAD). 

Individual Tax Identification Numbers are issued by the Internal Revenue Service (IRS), while Employment Authorization Documents are issued by United States Citizenship and Immigration Services (USCIS). 

How To Get An ITIN Number:

To obtain an Individual Tax Identification Number from the IRS, you need to complete an application and submit some additional documentation. 

Here are the documents that you will need in order to apply for an ITIN:

• Complete a Form W-7 – The Form W-7 is the Application for IRS Taxpayer Identification Number (ITIN). You will need to complete this form in its entirety to get an ITIN. 
• Federal Tax Return – You need to submit the completed Form W-7 along with the federal income tax return that you will be filing with the IRS. 
• Proof of Identity – You will need to provide the IRS with some type of identifying document in order to get an ITIN. 
• Foreign Status Document – The IRS requires documentation confirming your foreign status as either a resident or nonresident alien in the U.S. in order to issue an ITIN. 

Once you’ve gathered your documents and completed the Form W-7, you can mail the copies to the IRS, or make an appointment to visit an IRS Taxpayer Assistance Center in person.

Do I Need An ITIN Number?

Certain foreign residents living and working in the United States may be required to obtain an ITIN. Generally, if you are required to pay taxes on income earned in the U.S., and you are not eligible for a Social Security Number, you likely need to get an ITIN to meet your tax obligations.

You may need get an Individual Tax Identification Number if you meet one of the following descriptions:

• You are a resident or nonresident of the U.S. who needs to report U.S. based income on a federal tax return and you do not qualify for a SSN;
• You are a spouse or dependent of a resident alien or non-resident alien;
• Anyone living outside the U.S. who needs to file a U.S. tax return.

Do You Use An EIN or ITIN For Business?

You may use an ITIN instead of an EIN where an EIN is requested, however, not the other way around. You cannot use an EIN in place of an ITIN where an ITIN is required.

An “Employer Identification Number”, or EIN, is the type of IRS identification number assigned to business entities like LLCs and corporations. Business entities need to have an EIN number for several important functions, like opening business bank accounts, obtaining lines of credit, tracking payroll and obtaining business licenses..

Entrepreneurs often have questions about how an EIN works with an ITIN. Foreign residents operating businesses in the US often ask whether they are required to get an ITIN if they already have an EIN number for their company. 

This question comes from the fact that sole proprietors are able to use EIN Numbers instead of a Social Security Number in order to keep their personal finances separate from their business. Even single member LLCs must have an EIN to open a bank account.

Can You Work Legally With An ITIN?

Individual Tax Identification Numbers are not work permits. They do not authorize a foreign individual to be able to work in the United States. An ITIN can help you pay taxes on income you have earned in the U.S. However, simply having a tax ID number does not permit you to work.

Where Can I Find My ITIN?

There are several places you can look to find you ITIN:

• Previous Tax Returns
• Form W-7
• Contact the IRS at +1-800-829-1040
• IRS Taxpayer Assistance Centers near you
• Tax Preparer or Accounting Firm

Do ITIN Numbers Expire?

Yes, an ITIN can expire through inactivity for long periods of time. One way for an ITIN to expire is if the ITIN is not used on a federal tax return for three consecutive years, it will expire at the end of the third year. Then the ITIN may be reassigned to someone else. Visit the IRS website for more information on how to renew an expired ITIN.

How Long Does It Take to Get an ITIN?

Please note that an ITIN is not the same as an EIN. To obtain an ITIN, you must submit a copy of your passport with the Form W-7 (for ITIN) not an SS-4 (for EIN). The process tasks 7-11 weeks to obtain your ITIN.

The post What Is An ITIN Number? appeared first on IncNow.

The term “subsidiary” is used often in business, however, you might not know exactly what it means. Subsidiaries are an important part of the legal structure of nearly every large company.

In this article, we discuss what subsidiary companies are, how they are used, and the best way to structure them. 

What Is A Subsidiary Company?

A “subsidiary company” refers to a business that is wholly or majority owned by another company. The company that owns a subsidiary is often called a “parent” or “holding” company.

A subsidiary company is typically a separate business with its own team in charge of daily operations. However, the parent company may still have voting-control over the subsidiary and can make big decisions for the company. 

Businesses use subsidiaries as tools to protect valuable business assets from liabilities associated with daily business activities. Subsidiaries act like firewalls keeping the liabilities and obligations of one business separate from the assets of any other related businesses. 

A large company with multiple subsidiaries is like its own business ecosystem. Each individual company can operate independently and have its own assets and liabilities. Meanwhile, the parent company maintains ownership of these businesses under one entity while overseeing how they are being run. 

Are Subsidiary Companies LLCs?

Most subsidiary companies are set up as limited liability companies, or “LLCs”. This is because LLCs are more flexible, cost effective and simpler to manage compared to corporations. LLCs are the most popular entity type and represent three quarters of new businesses formed. Many of these new LLCs are subsidiary companies for big and small businesses alike. 

Are Subsidiary Companies Corporations?

Subsidiary companies are rarely set up as corporations. Instead, most subsidiaries are formed as Limited Liability Companies, or “LLCs”. LLCs are chosen because they are more flexible, cheaper, and easier to manage. Big and small businesses alike prefer using LLCs for their subsidiaries because of these benefits.

So, to put it simply: No, a subsidiary company is usually not a corporation. The LLC structure is the more popular choice for subsidiaries.

Examples of Subsidiary Companies

Companies of all sizes use subsidiaries as part of their corporate structure. Some of the world’s largest corporations use subsidiaries as a necessary strategy for protecting their diverse business interests. 

Here are some examples of companies that you might be familiar with who use subsidiaries:

• Google and YouTube as subsidiaries of Alphabet Inc;
• Instagram as a subsidiary of Meta Platforms, Inc., (formerly Facebook, Inc.);
• American Broadcasting Company (ABC Network) and ESPN as subsidiaries of the Walt Disney Company;

Alphabet, Inc. uses subsidiaries to successfully manage its different business lines. Alphabet, Inc. “dropped down” the Google search engine cash cow into a subsidiary to keep the business separate from the company’s other ventures. 

What Is A Wholly Owned Subsidiary?

A wholly owned subsidiary is owned 100% by its parent company. Wholly owned subsidiaries are typically used to protect particularly valuable assets that the parent company wants to keep legally separated from its business activities. Examples of this would be a summer camp forming a wholly owned subsidiary to hold title to a boat or a business forming one to own its private aircraft.

Pros and Cons Of Subsidiary Companies

There are some pros and cons associated with using subsidiary companies. Here are some points to consider when deciding whether to set up a subsidiary for your business: 

• Pros: Multiple Layers Of Legal Protection

Having subsidiaries helps companies limit liability risks across a business organization. For example, one company may file for bankruptcy without dragging the other related businesses through the process. Using a subsidiary also allows you to bring outside partners into new ventures without giving them a slice of the bigger “pie” from other businesses. 

• Cons: Extra Costs

Operating and maintaining multiple subsidiary companies can become costly. Forming an LLC often requires paying an annual fee to keep the company in good standing, in addition to the one time filing fees. For example, Delaware requires all LLCs in the state to pay a $300 Annual Franchise Tax each year. 

Additionally, subsidiary LLCs must maintain separate books, records and bank accounts in order to avoid mixing assets between businesses. This can add to the operating costs of each subsidiary company. 

How Much Do Subsidiary Companies Cost?

The most cost effective way to set up a subsidiary company is to form an LLC. The total cost of forming and maintaining a subsidiary LLC will depend on which state it is formed in. Between state annual franchise taxes and annual registered agent fees, an LLC typically costs $400 per year to maintain.

Why Delaware Is The Best State For Subsidiary Companies:

Both large companies and entrepreneurs prefer Delaware as the premier location for forming LLCs. This is because Delaware’s business laws provide protections for business owners that are unmatched by any other state. 

Google is likely the most recognized Delaware LLC in the world. General Motors is another well known company which has formed over 1,500 subsidiaries in Delaware. Entrepreneurs form thousands of Delaware LLC subsidiaries every month, each with discrete purposes and assets of their own. 

How Are Subsidiary Companies Taxed ?

Many subsidiary companies are “single-Member LLCs”. This is the case when the parent company is the sole owner of the subsidiary. The IRS disregards single-member LLCs for tax purposes. This means subsidiary LLCs do not need to file a separate tax return. Profits and losses of subsidiaries can be accounted for on the parent company’s books.

What Is a Subsidiary Agreement?

A “subsidiary agreement” is a term that business owners sometimes use to describe the LLC Operating Agreement of a subsidiary company. An LLC Operating Agreement is the company document that outlines how an LLC is structured. The LLC Operating Agreement provides details about a company’s ownership and management. One unique aspect of a subsidiary’s LLC Operating Agreement is that the parent company is typically the only Member of the LLC. 

What Is A Delaware Series LLC?

Delaware Series LLCs offer a simpler and more affordable way to protect multiple businesses under one company. A Delaware Series LLC is able to create an unlimited number of business cells called “protected series”. Each protected series is able to have its own business purpose, assets and liabilities. 

A Delaware Series LLC provides internal asset shields. This means the business assets of each protected series are off limits to creditors of any other protected series or the parent LLC.

Delaware requires Series LLCs to pay only one filing fee and one annual franchise tax no matter how many protected series they form. The Series LLC enables you to operate an unlimited amount of businesses under the ownership of one company without multiplying the costs. 

What Is a Foreign Subsidiary?

Businesses based outside the United States often want access to the large consumer markets in the United States to sell their products or services. When deciding to do business in the United States a business will often establish a separate entity to do business in the United States. That foreign business often decides to establish a corporation in the United States where its one stockholder is the foreign entity. Then the newly formed US based entity will often be known as a foreign subsidiary.

The business outside the United States may also choose to establish an LLC in the United States. For tax reasons, often tax advisors suggest that LLC make a “C-Corporation” tax election on IRS Form 8832 within 75 days of formation. That is because the foreign entity does not want to be taxed on its worldwide income in the United States. In some situations the foreign company may set up a “blocker” company in the Cayman Islands to be the owner of the US based LLC. The idea behind the blocker company would be to be an intermediate owner between the US subsidiary and the foreign company to block the foreign company from being taxed on its worldwide income in the United States. Before deciding what tax elections to make, the foreign company should consult with a US Certified Public Accountant. It may not be necessary to set up a blocker company if the new US subsidiary is taxed as a C-corporation, either by being started as a corporation or forming an LLC with a timely C-corporation tax election.

The foreign based company will also need to decide in which US state to file its corporation. Some foreign companies wrongly think that decision should be based on where the largest markets are or where they will actually have their US operational headquarters. Instead most well-informed foreign companies will decide to start a Delaware entity, because the laws of Delaware will govern the internal affairs of the company. Then that Delaware company can do business in any state, by filing a certificate of authority to do business in states where it has employees or offices.

When deciding whether to incorporate or form an LLC, another consideration is whether you want human beings to be put in a role as fiduciary. A corporation must have humans named as officers and directors. In contrast an LLC can have an entity serve as the Manager, and bypass the formalities of a corporation’s requirement of a “three layer cake” with a stockholder that elects directors who appoint officers annually in meetings.

What Is the Purpose of a Subsidiary Company?

Companies often decide to set up multiple subsidiaries to ringfence assets and operations into small fortresses that prevent cross liability in the event of a judgment creditor or other business problem. This avoids all assets being in one basket. It can turn the deep pockets into many tiny pockets, where the creditor of one property cannot collect against the assets of another entity. It can be adding another layer to the onion, which is known as a corporate veil where there is a holding company on top and multiple portfolio entities underneath to better shield assets.

What Is a Qualified Subchapter S Subsidiary?

A Qualified Subchapter S Subsidiary is when a corporation has established a corporate subsidiary. Normally a corporation subsidiary would be taxed as a C-corporation by default. However, for simplicity of accounting, often business owners want to have all of their portfolio companies “roll-up” into one tax return at the holding company level. That allows the parent company to offset losses from one subsidiary against the profits from another subsidiary to lower its effective tax rate. You may think why not just make an IRS Form 2553 tax election to simply have the subsidiaries taxes as S-corporations. The reason is because of restrictions on who can file an S-election. Having a corporation owned by a non-natural person entity would usually disqualify the S-election. So in order to have those subsidiaries “roll up” the subs would need to be established as single member LLCs or have the corporation subs make “Qualified Subchapter S Elections” to be treated as a “Q-Sub”.

The post What Is A Subsidiary Company? appeared first on IncNow.

Is the first step applying for a business license or forming a Delaware LLC? Unlike the chicken or the egg, this question has a definitive answer – the LLC formation comes before the business license. In order to begin doing business under a business license, you must first have formed the applicant. The LLC should be started first. Then you should obtain your business license. Similarly, you should form the LLC before obtaining an Employer Identification Number (EIN) from the IRS.

Is an LLC a Business License?

The requirement for a business license depends on where you are conducting business and what type of business you are conducting. Generally states and municipalities have business licenses for all types of activities. Often you need both a state business license and a municipal license in the incorporated municipalities where you do business. However simply forming an LLC does not require a business license and is not itself a business license. Instead an LLC is a Limited Liability Company. While the letter “L” appears twice in LLC, neither of those letters stands for license.

Instead an LLC is sometimes referred to as an artificial entity or an unincorporated entity. While the LLC has a general purpose clause that it can conduct any type of business that is not illegal, the actual conduct of that business usually requires additional government licenses.

Most businesses, regardless of entity type or ownership structure, are required to obtain one or more business licenses to conduct operations within a state and municipal jurisdiction. Often business licenses are renewed annually. If you form a Delaware LLC, and do not operate in Delaware, the business license will not be required in Delaware. It will likely be required in the local areas where you operate your plumbing service, restaurant, and rental properties, etc.

Why Form a Delaware LLC First?

The LLC itself is the applicant that applies for a business license, even if the manager or member is doing the work. The business license gives the authority to conduct the specific business activities you perform in the name of LLC.

How to Form a Delaware LLC

If you are physically located in Delaware and want to start a business, you would start by filing an LLC Certificate of Formation with the Division of Corporations in Delaware. You then would visit onestop.delaware.gov to obtain your business license. You will be prompted to answer business-specific questions about your company (services vs. goods for example). Once you obtain your business license, you are ready to operate a business within the geographical confines of Delaware.

On the other hand, if you are like 99% of Delaware LLC members and conduct business outside of Delaware, you will not need a Delaware business license.

Follow these steps if you operate a Delaware LLC outside of Delaware:

Step 1: Form your Delaware LLC with the Delaware Division of Corporations and obtain a Tax ID Number from the IRS, also known as an Employer Identification Number (EIN);

Step 2: Qualify your business, if required, through the non-Delaware states’ foreign LLC qualification process (often called a Certificate of Authority) and open a bank account;

Step 3: Analyze each state and locality’s specific rules governing business license requirements (often found at the state, city, or county level). Follow the individual steps outlined by each agency to obtain your business-specific licensing. Please note that some industries will have additional licensing required outside of state, city, or county-specific licensing (such as professional licensing for a doctor or attorney). You should also evaluate your insurance needs and other business operational requirements.

Once you have your Delaware LLC and any necessary qualifications and licenses, you’re well on your way to having a compliant business.

The post Do I Get a Business License or Delaware LLC First? appeared first on IncNow.

As an entrepreneur, you might be wondering how to open a business bank account for a Delaware-based company. The rules vary among banks in the United States, so it’s essential to check with your specific bank. We’ve put together a guide to help you understand the basic rules that all banks follow. Keep in mind, some banks might ask for more details based on their own policies.

Do Delaware Companies Need a Delaware Bank Account?

Good news – if your business is incorporated in Delaware, you can open a bank account in any state! Most Delaware businesses are actually based out of different states and even different countries. Whether you’re in California or India, you can register a company in Delaware and have business operations anywhere.

INCNOW: HOW TO START A U.S. COMPANY

The Delaware Secretary of State asks Delaware corporations to submit an Annual Report, however, they do not ask for any banking details. Plus, the Delaware Code doesn’t require you to have a bank account in Delaware or any other state.

How To Open a Business Bank Account: 5 Steps

When you’re ready to open a business bank account in the United States, follow these steps:

Step 1.) Find your bank:

Each bank has its own set of requirements, so start by checking with the bank you’re interested in.

Step 2.) Prepare your information:

Banks need to know who their customers are. Be ready with:

• Your legal name or your business’s legal name
• Your address (residential or business), or if you don’t have an address, other options like an Army Post Office or Fleet Post Office box number, or the address of a close relative or contact person
• Identification number like an Employer Identification Number (EIN), Social Security Number or other government ID number

Step 3.) Gather additional documents:

For businesses, banks often ask for more information. Some additional documents that a bank could ask for to open an account for an LLC or corporation include:

• Certificate of Formation for an LLC
• Certificate of Incorporation for a corporation;
• an LLC Operating Agreement;
• Corporate minutes;
• Corporate bylaws; or,
• Corporate stock certificates.

Step 4.) Identify the beneficial owners:

Banks need to know who owns the business. This includes anyone who directly or indirectly owns 25% or more of the business and anyone with significant responsibility to control, manage, or direct the business.

Step 5.) Open your account:

The person opening the account will need to provide the bank with all this information. The owners of the business don’t need to be present when the account is opened.

Selecting the Right Bank for Your Business

When you’re ready to open a business bank account, it’s important to choose the right bank. Here are some factors to consider:

1.)Fees:

Some banks charge monthly fees, transaction fees, or minimum balance fees. Be sure to understand all potential charges before opening an account.

2.) Online and mobile banking:

In today’s digital world, having access to your account anytime, anywhere is crucial. Check whether the bank offers a robust online and mobile banking platform.

3.) Customer service:

Good customer service can be a lifesaver when you’re dealing with banking issues. Look for banks known for their exceptional customer service.

4.) Additional services:

Think about the future needs of your business. You might require a business credit card, merchant services, or a line of credit in the future. Find a bank that offers these additional services.

After Opening Your Business Bank Account

Once you’ve opened a business bank account, it’s important to only use it for business-related transactions. This helps protect your personal assets by keeping your personal and business accounts separate.

 Keeping Your Business and Personal Finances Separate: Top Tips

One of the most important steps after opening your business bank account is maintaining a clear line between your personal and business finances. This is crucial for legal reasons and it also makes it easier to manage your money. Here are our top tips:

Tip #1.) Use your business account for business expenses only:

This means all your business-related expenses, including supplies, inventory, business trips, and anything else that’s directly related to your business.

Tip #2.) Pay yourself a salary:

Transfer money from your business account to your personal account as your salary. This keeps your personal and business finances separate and gives you a clear idea of your business’s profitability.

Tip #3.) Keep detailed records:

It’s a good idea to keep records of all your business transactions. This will make things easier when it comes time to file taxes or if you need to track specific expenses.

Tip #4.) Work with a professional:

Consider hiring an accountant or bookkeeper to help manage your business finances. They can provide valuable advice and help you avoid any potential financial pitfalls.

Common Mistakes to Avoid When Managing a Business Bank Account

To help you manage your business bank account effectively, here are some common mistakes to avoid:

Business Banking Mistake #1.) Co-mingling Personal and Business Expenses:

Keep these separate. Mixing personal and business expenses can lead to accounting headaches and potential legal issues.

Business Banking Mistake #2.) Poor Record Keeping:

Be meticulous about recording all transactions. This practice will make it easier to track business growth, plan for taxes, and prepare for potential audits.

Business Banking Mistake #3.) Overlooking Bank Fees:

Banks often charge fees for services such as wire transfers, excessive transactions, or minimum balance requirements. Be aware of these to avoid unexpected charges.

Opening a bank account for your Delaware business doesn’t have to be complicated. Follow these steps, keep your business and personal finances separate, and you’ll be well on your way to financial success.

The post Opening a Business Bank Account: A Guide for Delaware Companies appeared first on IncNow.

Forming a Delaware Limited Liability Company(LLC) is a wise choice for real estate investors seeking asset protection and business growth. Real estate investing remains an attractive method for generating income, building wealth, and diversifying portfolios. As with any business venture, it’s essential for investors to carefully evaluate their businesses’ structures to maximize personal asset protection.

Among various business entities, Delaware LLCs stand out as the top choice for real estate investors. This article examines Delaware LLC advantages for real estate investors. We also highlights the drawbacks of a sole proprietorship.

The top six Delaware LLC Benefits for real estate investors:

1. Asset Protection
2. Credibility with Lenders and Partners
3. Tax Advantages
4. Easy Setup and Maintenance
5. Flexibility
6. Enhanced Privacy

Delaware LLCs: Key Benefits for Real Estate Investors

Delaware LLC Benefit #1) Asset Protection

• Limited personal liability protection.
• Separate LLCs for each property protect assets within the property portfolio.

Delaware LLCs offer limited personal liability protection for investors and separates personal assets from company debts and liabilities. This protection is critical for investors who may face risks such as tenant lawsuits, property damage claims, or financial losses due to real estate market downturns.

Additionally, by creating separate LLCs for each property, investors can protect their assets within their property portfolio, insulating each property from risks associated with other properties.

 Delaware LLC Benefit #2) Credibility with Lenders and Partners

• Enhanced credibility due to Delaware’s business-friendly environment.

Operating under a Delaware LLC can increase a real estate investor’s credibility with lenders, partners, and other stakeholders. Delaware is renowned for its business-friendly environment, and many investors perceive Delaware LLCs as an indicator of a professionally structured organization.

Improved credibility resulting from a Delaware LLC formation can lead to better financing terms, more appealing partnership opportunities, and greater overall success in the real estate industry.

Delaware LLC Benefit #3) Tax Advantages

• Flexible taxation options.
• Potential tax savings for real estate investors.

Delaware LLCs offer flexible taxation options, which can significantly benefit real estate investors. By default, an LLC is taxed as a pass-through entity, meaning that the company’s income and losses pass through to the individual members’ tax returns, avoiding double taxation. However, a Delaware LLC can also choose to be taxed as a C-Corporation or an S-Corporation, depending on the business’s specific needs.

The ability to select the most advantageous tax structure can lead to substantial tax savings for real estate investors. For instance, an LLC taxed as an S-Corporation can help investors avoid self-employment taxes on part of their income, while an LLC taxed as a C-Corporation can take advantage of the lower corporate tax rate and potentially benefit from deductions related to property depreciation and other real estate-related expenses.

Delaware LLC Benefit #4) Easy Setup and Maintenance

• Simple and straightforward setup.
• Minimal requirements to maintain good standing.

Setting up a Delaware LLC is relatively simple and straightforward. A Delaware registered agent can assist with the entire process, including filing the necessary formation documents with the Secretary of State’s office.

There are minimal requirements to maintain a Delaware LLC after it is formed. To remain compliant, a Delaware LLC must pay an annual franchise tax of $300, making it an affordable option for real estate investors who want to focus on their investments rather than administrative tasks.

Delaware LLC  Benefit #5) Flexibility

• Customizable ownership and management structures.
• Simple ownership transfer process.

Delaware LLCs are versatile business entities that allow for customized ownership and management structures. Furthermore, transferring ownership in a Delaware LLC is simple and does not require filing any public documents with the state.

A Delaware LLC makes it easy and efficient to add new owners as an investor’s portfolio grows or they decide to take on partners. This flexibility can be crucial when engaging in joint ventures, syndications, or other collaborative real estate projects.

Delaware LLC  Benefit #6) Privacy for Real Estate Investors

• No public disclosure of names or addresses of LLC owners.
• Greater privacy compared to other states.

A key advantage that Delaware LLCs offer real estate investors is privacy. The publicly filed Certificate of Formation for a Delaware LLC does not include the names or addresses of the LLC’s owners. This is particularly beneficial for real estate investors who want to keep their personal information private.

Delaware LLCs provide a level of privacy that is not always available in other states. Many other states require LLCs to disclose the names and addresses of all the Members and Managers involved with the company. Delaware only requires the name of the LLC and the company’s Delaware registered agent address to be included in the state’s public database.

 What is a Delaware LLC?

A Delaware LLC provides limited liability protection for owners, safeguarding personal assets from company debts and obligations. An LLC establishes a clear legal distinction between the business and its owners, who are referred to as “Members.”

Forming an LLC involves submitting a formation document to the Secretary of State’s office for public record. In Delaware, completing this document only requires the LLC’s name and details about the company’s designated Delaware registered agent.

Delaware LLCs are versatile business structures suitable for various uses, from large-scale commercial ventures to solo consulting practices. Companies utilize Delaware LLCs to protect valuable business assets such as real estate, trademarks, and intellectual property.

Why Choose Delaware For Your LLC?

• Favorable business-centered legal climate.
• Affordable fees and fast filing times.
• No residency requirements to set up a Delaware LLC.

 Delaware ranks among the top states for establishing LLCs, thanks to its favorable business laws, affordable fees, and fast filing times.

The state where an LLC is formed sets the laws that govern the company. Delaware’s LLC laws are known for providing robust protections for business owners and managers. Delaware’s specialized business court, the “Court of Chancery,” helps resolve disputes quickly while safeguarding business owners’ rights.

There are no residency requirements for setting up a Delaware LLC, so entrepreneurs can take advantage of Delaware’s legal system from anywhere globally. You don’t need an office or to visit Delaware to create a Delaware LLC.

Sole Proprietorships: Real Risks for Real Estate Investors

Investing in real estate as a sole proprietorship may be simpler and less expensive than forming a Delaware LLC. However, operating as a sole proprietor comes with numerous disadvantages and risks. Here are the top reasons why real estate investors should avoid sole proprietorships.

Sole Proprietor Risk #1) No Personal Liability Protection

• Personal liability for all debts and liabilities related to the business.

Operating as a sole proprietor means that a real estate investor is personally liable for all debts and liabilities related to their business. Real estate investors risk exposing their personal assets to tenant lawsuits or financial losses from property investments when operating as a sole proprietor. In contrast, a Delaware LLC provides a layer of protection between an investor’s personal assets and their business’s debts, liabilities, or financial obligations.

Sole Proprietor Risk #2) Limited Tax Options

• Limited tax strategies for real estate investing.

As a sole proprietor, a real estate investor is taxed as a pass-through entity, with all income and losses reported on their individual tax return. Pass-through taxation may be suitable for some investors; however, it limits the tax options and strategies available for real estate investing. As mentioned earlier, a Delaware LLC offers the flexibility to choose from various tax structures, providing potential tax savings and advantages for real estate investors.

Sole Proprietor Risk #3) Lower Credibility

Operating as a sole proprietor may lead to lower credibility with lenders, partners, and other stakeholders in the real estate industry. Forming a Delaware LLC signals an investor’s professionalism and commitment to their business, making it more attractive to those considering investing, lending, or partnering with the real estate investor.

Sole Proprietor Risk #4) Less Flexibility

• More complex and time-consuming to add partners or transfer ownership.

Bringing in partners or transferring ownership can be more complex and time-consuming with a sole proprietorship than with a Delaware LLC. The flexibility that an LLC provides makes it a more suitable option for real estate investors who may need to adapt their business structure as their portfolio grows.

Should Real Estate Investors Form a Delaware LLC?

Real estate investors can gain numerous benefits from forming a Delaware LLC instead of operating as a sole proprietor. These advantages include asset protection, increased credibility, tax flexibility, and easy setup and maintenance.

Although starting as a sole proprietor might be simpler and less expensive initially, the long-term benefits of a Delaware LLC make it a wise choice for investors who want to optimize their business structure.

In conclusion, Delaware LLCs provide real estate investors with an optimal business structure that offers asset protection, credibility, tax advantages, easy setup and maintenance, flexibility, and privacy.

While operating as a sole proprietor may seem more straightforward, the disadvantages outweigh the benefits when considering the potential risks involved. Real estate investors should strongly consider forming a Delaware LLC to protect their investments and grow their portfolios successfully.

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Most entrepreneurs are optimistic when starting a new business venture. However, many understand that commerce is inherently risky. According to the U.S. Bureau of Labor Statistics, 20% of new businesses fail within two years, and only 50% make it to their fifth year.

It’s ok if you decide to close your business. However, you need to make sure that you properly wind up and cancel your Delaware LLC to avoid potential penalties or costly disputes. Unlike LLCs formed in other states, canceling a Delaware LLC is a simple process. Here’s how to close a Delaware LLC.

How to Close a Delaware LLC: 3 Steps

Formally closing a Delaware LLC requires completing the following steps:

Step 1.) Members Vote on Cancellation

Before proceeding with closing the business, the existing Members must agree to cancel the LLC. Oftentimes the LLC Operating Agreement will include a provision detailing how Members should come to a decision on whether to cancel the LLC.

Step 2.) Complete a Wind Up of the LLC

The next step in canceling an LLC is to “wind up” the business assets. Winding up an LLC involves using available funds to pay all outstanding business creditors before distributing any remaining assets to Members before officially closing the business.

To wind up an LLC, the business must distribute its remaining assets to creditors first and Members second, while also setting aside funds for 10 years of potential creditor claims.

Before officially closing an LLC, Members or Managers should take steps to formally end business operations. This may involve:

• Terminating all contracts;
• Withdrawing any foreign qualifications;
• Canceling any licenses or permits;
• Notifying customers and suppliers; and,
• Closing business credit lines and bank accounts.

The purpose of winding up an LLC is to dissolve the business properly, fulfilling all legal and financial obligations before officially closing the company.

Step 3.) File a Certificate of Cancellation

Formally closing a Delaware LLC requires filing a Certificate of Cancellation with the Delaware Division of Corporations. After the Certificate of Cancellation is filed, the LLC will be removed from the state’s database and will lose its perpetual existence, meaning that it will no longer be allowed to conduct business. Additionally, the LLC will no longer be responsible for paying Delaware Annual Franchise Tax fees.

How to Wind Up an LLC

An LLC’s Members need to wind up the company’s affairs before filing the Certificate of Cancellation. Winding up the LLC involves addressing the company’s liabilities and distributing its remaining assets.

An LLC must discharge any known claims or liabilities against the company, including prospective foreseeable claims, before the LLC can be formally canceled.

Some examples of potential claims include:

• Employee wage claims;
• Vendor or supplier invoices;
• Unpaid rent or mortgages;
• Outstanding loan or credit card balances;
• Unpaid taxes; and,
• Legal settlements or judgments.

Why is Winding Up an LLC Important?

The LLC Members must either pay all the company’s obligations or make reasonable plans to pay. It is important to prioritize and pay off any known liabilities before canceling the LLC. This helps better protect the personal assets of the Members or Managers. If the LLC fails to pay off its debts, creditors could have legal grounds to go after the personal assets of Members or Managers.

How to Distribute an LLC’s Assets: 4 Steps

After discharging the company’s liabilities, the Members can move forward with distributing any remaining business assets. An LLC’s assets should be distributed in the following order:

Step 1. Satisfy Creditors

Creditors are always first to receive distributions when an LLC is being closed. Business creditors may include Members and Managers depending on some provisions of the law.

Step 2. Satisfy Distributions to Members.

After satisfying business creditors, an LLC can proceed with making distributions to current and former Members. Members may set out these distributions in the LLC Operating Agreement.

Step 3. Return Contributions to Members

After satisfying any agreed upon distributions, each Member should have their initial capital contribution returned by the LLC.

 Step 4. Make Final Distributions

Finally, the LLC should use any remaining business assets to make distributions to existing Members proportional to their ownership share in the company.

These are general guidelines for distributing an LLC’s assets during a wind up. However, LLC Members can arrange their own priority of payments in the Operating Agreement.

What Happens When an LLC Is Void?

LLCs must meet certain requirements in order to remain compliant with their state of formation. If an LLC is not compliant for a prolonged period of time, the state may administratively cancel the LLC. This is known as the company becoming “void”.

The Delaware Division of Corporations will void a Delaware LLC for two reasons:

1. Failure to Pay Delaware Annual Franchise Tax

The state will void a Delaware LLC if the company fails to pay its Delaware Annual Franchise Tax balance for three consecutive years.

The Delaware Annual Franchise Tax is a flat fee of $300 due each year after an LLC is formed. A Delaware LLC will owe franchise tax in any calendar year which it exists, regardless of whether the company had any income in a given year. Delaware also charges a $200 late fee and interest to LLCs that fail to pay the franchise tax on time.

2. No Registered Agent for 30 Days

The Delaware Division of Corporations will void a Delaware LLC if the company does not have a registered agent assigned in the state’s public database for more than 30 days.

Delaware requires LLCs to have a Delaware registered agent assigned to represent the company at all times while the LLC is in existence.

Can You Revive a Void Delaware LLC?

A Delaware LLC that has become void, due to either failing to pay its franchise tax balance or not assigning a registered agent, can be revived. In some cases, a revival can be more simple and less costly than forming a new LLC.

To revive a void Delaware LLC, you can file a Delaware Certificate of Revival. Filing the Certificate of Revival will restore the LLC’s existence and maintain the company’s business history. A Delaware registered agent can assist you with filing a Certificate of Revival with the Delaware Division of Corporations.

Note that before a Certificate of Revival can be filed, an LLC must pay the Annual Franchise Tax that it owes. This includes the annual fees of $300 that are owed, as well as any late fees that have accumulated. In some instances, starting a new Delaware LLC might be a better option for the business instead of reviving the old one.

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