How to Start an LLC in North Dakota
Starting a business can often be a daunting task, but that’s not the case when forming a Limited Liability Company (LLC). LLCs offer a straightforward and convenient way to establish and operate a business. In North Dakota, the process of creating an LLC is designed to be uncomplicated enough for newcomers to handle by themselves, making it even more convenient for aspiring entrepreneurs like you.
In this article, we will explore the steps involved in starting an LLC in North Dakota and delve into the benefits that come with choosing this business structure.
What is an LLC?
LLC, or Limited Liability Company, is a popular business structure involving one or multiple owners. It is one of the most flexible business entities in the US—one that also offers asset protection. LLC ensures that all your assets remain safe against all business risks, including operational, financial, and reputational losses.
Choosing North Dakota as the location to establish your LLC is a strategic decision that can benefit your business. For one, the state offers several advantages for LLC development. ND imposes minimal taxes on the profits of LLC owners, which can result in significant tax savings. Additionally, North Dakota allows for the formation of both domestic and foreign LLCs.
There are many more facts to learn about LLCs, so let’s jump to the next section.
What Are The Advantages Of An LLC In North Dakota?
Whether you’re a high-risk company or a small business, an LLC offers you several good reasons to choose it as a business entity. Not only is the process short, but the rules are also simple. An LLC also allows you to enjoy the benefits of other business forms, such as sole proprietorship, partnership, and corporation.
Let’s dig a little deeper into the advantages of ND LLC formation.
One of the main characteristics of an LLC is asset protection, which also happens to be its biggest advantage. According to LLC rules, only business assets are subject to business debts, lawsuits, losses, risks, and other issues. The owner’s assets are not, and cannot, be used to handle operations and finances. In other words: having an LLC keeps personal assets separate from business assets.
Flexible and low-rate taxation
You will find LLCs more advantageous than other business structures in terms of tax payments. LLCs are known for their pass-through taxation system, which means that taxes are not paid at the company level but are passed through to the individual owners. The owners are responsible for paying personal income tax on their respective shares of the LLC’s profits. Apart from all this, North Dakota has lower tax rates compared to other states.
You can also choose to be taxed as an S-Corp or C-Corp. In these cases, the company itself will be subject to federal income tax and potentially other taxes, in addition to the owners paying taxes on the dividends or distributions received from the corporation. And while this usually means more documents and sometimes more fees, it also means that your LLC can receive all the benefits of a corporation, like stock options. Anyway, you can change tax methods at any time.
Convenient management structure
An LLC member and/or owners are also its managers. By default, owners are responsible for managing business operations and affairs. However, there is also an option for owners to hire managers to handle the day-to-day business dealings. This operational structure, known as manager-managed LLCs, is permitted and encouraged in North Dakota. Manager-managed LLCs are particularly suitable for larger companies and owners who may have less experience in managing business operations themselves.
When you form an LLC, you can have one member or as many members as you want. Single-member and multi-member LLCs offer the same privileges and follow the same formation rules. For instance, sole members will be taxed as sole proprietors, meaning they must pay taxes on their net profit. The tax treatment for multiple members is much the same, though the tax burden is divided amongst its members.
What Are The Disadvantages Of An LLC In North Dakota?
You’ve acknowledged the advantages and tools LLCs offer. Now, let’s take a look at some possible downsides—and what you can do to circumvent them.
Difficult to sell
The sale of an LLC is more complex than the sale of a sole proprietorship or general partnership. When you sell a sole proprietorship or general partnership, you are essentially selling your own business. The buyer does not need to be approved by anyone else.
Meanwhile, when you sell an LLC, you are selling a share of the business. The buyer will need to be approved by the other members of the LLC before they can become a member. It’s not a problem for a single-member LLC, but it’s something to consider if you are co-owning the business or opening it up for investment.
Transferring ownership in an LLC differs from a corporation and involves a more involved process. When you wish to transfer your ownership interest in an LLC, you must first find a buyer who is willing to purchase your shares or membership interest. This usually involves actively seeking out potential buyers, negotiating terms, and reaching an agreement on the purchase price and other relevant details.
How to Form an LLC in North Dakota
North Dakota is known for its streamlined and accommodating processes when it comes to forming a Limited Liability Company. You just need to follow the steps below.
- Pick a unique name for your business
- Choose a Registered Agent in North Dakota
- Submit the Articles of Organization
- Create an Operating Agreement
- Obtain an EIN
Pick a name for your LLC
The first step in forming an LLC in North Dakota is to choose a name for it. The name must be unique and cannot be the same as any other existing LLC name in the state. You can check the availability of a name using the name database on the North Dakota Secretary of State’s website. The LLC applicants have the option to reserve their LLC name for 12 months for $10.
Some words are also not allowed to be used in an ND LLC name. These words include certain institute-specific names, such as “attorney,” “college,” “finance,” and “bank.” Similarly, using words that specify any government agency is prohibited as well.
North Dakota also permits LLC owners to use a Doing Business As (DBA) name in North Dakota if they prefer not to disclose the original LLC name. To enroll in your DBA, get a Trade Name Registration form and submit it to the ND Secretary of State. The DBA registration costs $25.
Hire a Registered Agent
An LLC has some crucial legal matters that need to be looked after on a daily basis. To effectively manage all legal matters of an LLC, it is essential to appoint a registered agent. Their duties typically involve receiving and handling legal notices, notifications, and official documents on behalf of the company.
In accordance with the rules and regulations of North Dakota LLCs, the registered agent must meet certain qualifications. Firstly, they must be a resident of North Dakota. They must also have a local street address. A post office box is not sufficient; the address should be a physical location where legal documents and official correspondence can be received.
Individuals associated with both domestic and foreign corporations and LLCs are eligible to serve as registered agents. This means that someone who is involved with managing or representing either a domestic North Dakota corporation or an LLC, or a foreign corporation or LLC operating in North Dakota, can fulfill the role of a registered agent for an LLC.
In North Dakota, there are registered agent companies that provide specialized and professional services for LLCs. Alternatively, LLC members themselves can also elect to take on the role of a registered agent. However, it is important to consider the responsibilities involved. Serving as a registered agent requires constant availability during regular office hours and may expose individuals to complex legal situations and potentially embarrassing lawsuits. Sometimes it’s best to hire someone for this position.
Submit the Articles of Organization
The Article(s) of Organization is a document containing information about an LLC, such as its name, members, duration, and office address, among others. You must file this form with the Secretary of State with a corresponding $135 fee. This will officially register your LLC at a federal level. LLC applications are approved in North Dakota within two to three weeks.
North Dakota offers multiple ways to receive your application: online, by mail, or by fax. If you are not from North Dakota and would like to establish a business in the state, you need two additional requirements: an Application for Authority and a Certificate of Existence obtained from your home state. The fee for foreign LLCs is also $135.
Create an Operating Agreement
The North Dakota Operating Agreement is a legal document that outlines and addresses various operational and managerial aspects of the LLC. It explains your LLC’s management and tax structure, rights, boundaries, owners’ privileges, dissolution procedure, etc. Moreover, it specifies how the business will operate, how the roles and responsibilities will be distributed among members, and what principal members can add or remove.
By creating an Operating Agreement, LLC members can proactively define and address important matters such as ownership percentages, profit distribution, decision-making processes, and other relevant provisions. So while the document is not mandatory to operate an LLC in North Dakota, it does help maintain discipline between the owners.
Obtain an EIN
After forming an LLC, you must hire employees, open bank accounts, and pay due taxes. You can perform these tasks only if you have an Employer Identification Number (EIN). The form is available on the IRS website. After getting an EIN, you can now also apply for necessary business licenses and other permits.
Types of LLC
Which type of LLC is ideal for me?
In North Dakota, there are mainly two types of LLCs: Domestic LLCs and Foreign LLCs. I’ll provide a brief explanation of each type to help you understand which one might be suitable for your needs.
- Domestic LLC: A domestic LLC is formed within the state of North Dakota and is subject to the state’s laws and regulations. If you’re planning to start a new business or convert an existing sole proprietorship or partnership into an LLC within North Dakota, you would establish a domestic LLC.
- Foreign LLC: A foreign LLC is an LLC that has been formed in another state (or country) but wants to conduct business in North Dakota. If your LLC is already established in another state and you plan to expand or operate in North Dakota, you would register as a foreign LLC.
Applicable LLC Taxes in North Dakota
North Dakota levies taxes on LLCs in the same pattern as most other US states. However, the tax rates are comparatively low, which attracts many entrepreneurs like you to start businesses here in the first place. Below are the tax types you need to be concerned about.
Federal Income Tax
LLCs enjoy pass-through taxation by default. This means that the LLC itself is not subject to taxes at the federal level for income tax purposes. Instead, the profits and losses of the LLC “pass through” to the individual members, who report them on their personal tax returns. ND federal income tax rates vary depending on the business’ income.
For example, for an income of up to $25,000, ND LLCs incur a tax rate of 1.41%. LLCs with incomes ranging from $25,000 to $50,000 must pay $352.5 plus 3.55% of the income above $25,000. And if an LLC’s income goes above $50,000, the imposed tax will be $1,240 plus 4.31% of the amount over $50,000.
LLCs may also choose to be treated as a corporation for tax purposes. In such cases, the LLC would be subject to federal income taxes as a separate entity. These companies would need to file a corporate tax return and pay taxes accordingly.
Personal Income Tax
In North Dakota, individuals who earn profits through their LLCs are subject to state taxes based on income brackets. Here is a breakdown of the initial tax rates and amounts:
- For profits up to $41,775, there is a tax rate of 1.1%. So, if your profit falls within this range, you would owe 1.1% of the total profit.
- If your profit falls between $41,775 and $101,050, you would owe $459.53 plus 2.04% of the amount over $41,775. This means that you would pay a fixed amount of $459.53, and for the portion of your profit exceeding $41,775, an additional 2.04% tax would be applied.
- For-profits between $101,050 and $210,825, the payable tax amount is $1,668.74 plus 2.27% of the amount over $101,050. In this case, you would owe a fixed amount of $1,668.74, and for the portion of your profit exceeding $101,050, an additional 2.27% tax would be calculated.
More brackets are added as you go up in profits. You can ask the Secretary for more details as you grow.
Again, note that these tax rates and brackets are specific to North Dakota state taxes on individual income derived from LLC profits. If you are unsure about your tax obligations, consult with a tax professional or accountant. They can help you understand your tax situation and ensure that you are paying the correct amount.
Sales and Use Tax
This tax is applied to all sales, which includes items such as goods, equipment, and certain services. The current sales tax rate imposed by North Dakota is 5%. The LLC is responsible for collecting and remitting this tax to the state on behalf of the government.
What Are The Costs of Forming An LLC in North Dakota?
LLCs are not only easy to form, but they do not have a lot of costs involved as well. This is especially true for LLCs in North Dakota, where business operation rates are more affordable. The costs of creating an LLC in North Dakota typically only include the following:
Filing Fee for Articles of Organization
Registered Agent (if using a professional)
Foreign LLC Application for Certificate of Authority
Expedited Filing (optional)
Certified Copy of Filed Document (optional)
An LLC provides owners with limited liability protection, shielding their personal assets from the liabilities of the business. Additionally, the pass-through taxation feature allows LLC profits and losses to be reported on individual tax returns, eliminating the need for separate corporate taxes.
Fortunately, LLC formation in North Dakota is not as complicated as other business structures. By following a few simple steps, individuals can establish an LLC and enjoy benefits such as asset protection, simplified taxation, and streamlined business management.
Is LLC The Best Entity For Me?
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