Yes, you would need an LLC to start a clothing line business. Even though there are several options when it comes to the business structure of a clothing line, the one that most players consider is an LLC. A Limited Liability Company (LLC) is the US-specific form of a private limited company.
It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is not a corporation under state law; it is a legal form that provides limited liability to its owners. LLCs are known for the flexibility that they provide to business owners.
An LLC is a hybrid legal entity that has the characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC is a type of unincorporated association distinct from a corporation.
The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. As a business entity, an LLC is often more flexible than a corporation and may be well-suited for companies with a single owner.
How Much Does It Cost to Get an LLC for a Clothing Line?
When it comes to the cost of getting an LLC for a clothing line business, it is important to note that the filing costs will vary depending on the state laws but generally range from around $40 to up to $500. Please note that in addition to filing the articles of organization, most states require that businesses obtain a business license. Business license costs range from around $50 to $100 in most states.
Steps to Get an LLC for a Clothing Line
When it comes to filing an LLC for a clothing line business in the United States, it is important to note that each state has its filing requirements and fees. However, this is the basic that is expected from anyone who wants to form an LLC for a clothing line business in the United States;
Table of Content
- STEP 1: Choose A Name for Your Limited Liability Company (LLC)
- Step 2: Appoint A Registered Agent in Your State
- Step 3: Prepare and File Certificate of Formation with County Probate Court
- Step 4: Prepare an Operating Agreement
- Step 5: Acquire an Employer Identification number
- Step 6: File State Tax Return/Annual Report
- Step 7: Securing Business Licenses and /or Permits
- Step 8: Taxes
- Step 9: Open Your LLC Bank Account
- Step 10: Apply and Obtain Your Business Phone Number
- Step 11: File Your LLC Biennial Report
- LLCs Are Subject to Fewer Regulations Than Traditional Corporations
- An LLC is Treated By Default As A Pass-Through Business Entity
- Choice of Tax Regime
- Enjoys Limited Liability
- Enjoys Flexible Membership
- Treated as Entities Separate from Their Members
- Most States Do Not Dictate Detailed Governance and Protective Provisions for The Members of an LLC
- Difficulty in Raising Financial Capital
- Attracts Franchise Tax
- Attracts Higher Renewal Fees
- Unfavorable Tax Jurisdiction Outside the United States
STEP 1: Choose A Name for Your Limited Liability Company (LLC)
Under most state laws, an LLC’s name must contain the words “Limited Liability Company” or the abbreviations “LLC” or “L.L.C.” Your LLC’s name may not contain a word or phrase which indicates or implies that it is organized for a purpose not contained in its articles of organization.
Your LLC’s name must be distinguishable from the names of other business entities already on file with the Secretary of State. You must reserve your LLC’s name with the Secretary of State before filing your LLC formation documents. You may do so online for a $28 fee depending on the state.
Your proposed name will be automatically checked for availability and you will receive your name reservation immediately at the end of the process. Alternatively, you can submit a Name Reservation Request Form for Domestic Entities form by postal mail to the Secretary of State’s office.
This requires payment of a $10 fee. Before submitting the form, you should search the Secretary of State’s business name database to be sure the proposed name is available. To give you a better understanding, here are some of the naming guidelines:
- Your company name must contain the phrase “Limited Liability Company” or any of its abbreviations (L.L.C. or L.L.C.)
- Your company should not include words or phrases that might make the public confuse your company with a government agency such as F.B.I., State Department, NASA, or Treasury. Examples of such restricted words include Bank, University, and Attorney.
- If you want to make use of restricted words like Attorney, Bank, and the rest, you will need more paperwork as well as a licensed individual such as a lawyer or doctor to be a member of your L. L.C.
- You can check if the name you intend to use is available by carrying a search business
So also, you must make sure that the name you want to use for your clothing line business is not already taken. You can check if the name is unique by searching the name on the State’s website. Also, make sure your business can use its name as a web domain. Even though creating a business website is not on your plan, it is best you purchase the URL to stop others from using it.
After you have registered a domain name, consider creating a professional email account. A professional email that makes use of your domain name is vital to establishing trust between your business and its customers. In this modern era where scam is high, companies need to make use of a professional email address to provide a sense of professionalism and credibility.
Please note that you don’t have to use your LLC’s official legal name when you do business out in the real world. Instead, you can use a trading name, also called a “DBA” (short for doing business as), assumed name, or fictitious business name.
To do so in most states, you simply start using the trade name to identify your LLC in the state. You may also apply to Register your Trade Name with the Secretary of State by mail and pay a $30 fee. Registration is not mandatory or confers any legal rights, but does alert others that the name is in use in your state.
Step 2: Appoint A Registered Agent in Your State
Next, you are required to choose a registered agent for your L.L.C. in your state. A Resident Agent is a person or company who receives your LLC’s documents, notices, and legal mail (called Service of Process). Because of this, the Resident Agent must have an actual street address in their state (PO boxes are not allowed by the state). Picture your registered agent as your company representative to the state.
Please note that you, your friend or family members, or a commercial resident agent are qualified to be your LLC’s Resident Agent.
Step 3: Prepare and File Certificate of Formation with County Probate Court
You are expected to prepare and file a certificate of formation for your LLC as required by your state. For example, an Alabama LLC is created by filing a Certificate of Formation. Unlike most states, the certificate is not filed with the Secretary of State.
Instead, you must file it by postal mail with the Office of the Judge of Probate in the county where the LLC’s initial registered office is located. The Probate Court files the form and provides you with a stamped copy.
The court then transmits the certificate to the secretary of state along with your fee. A list of the names and addresses of the probate judges for every Alabama county can be found on the Alabama Secretary of State’s website. The certificate of formation must include the following information:
- the LLC’s name
- the name and address of the LLC’s registered agent
- an indication of whether the LLC is a series LLC, professional LLC, or non-profit LLC by checking the appropriate box
- the effective date the LLC will begin if different from the Certificate of the Formation filing date, and
- the signature of the organizer or attorney-in-fact.
A copy of the Name Reservation certificate from the Secretary of State must be attached. The filing fee is $100 to the Secretary of State plus a separate Probate Court filing fee which is at least $50.
Step 4: Prepare an Operating Agreement
An LLC operating agreement is required in some states. This is an internal document that establishes how your LLC will be run. It sets out the rights and responsibilities of the members and managers, including how the LLC will be managed. It can also help preserve your limited liability by showing that your LLC is truly a separate business entity. In the absence of an operating agreement, state LLC law will govern how your LLC operates.
Step 5: Acquire an Employer Identification number
An Employer Identification Number (E.I.N.) also known as Federal Tax Identification Number is a 9 – digit number similar to a social security number. The Employer identification number will be used to identify your business. It is like a social security number for your company.
An Employer Identification number is essential because you will need it to open a business account for your company, to hire employees as well as tax purposes. You can obtain your E.I.N. from the I.R.S. after creating your company. You can do it via mail or online. Note: It won’t cost you a dime to get an E.I.N. from the I.R.S.
You can obtain an EIN from the IRS either;
- Via mail (approval takes 4 weeks)
- Via fax (approval takes 4 business days)
- Via online application (approval is instant at the end of the application)
Step 6: File State Tax Return/Annual Report
Some states require LLCs to file a combined Business Privilege Tax Return and Annual Report with the Department of Revenue each year. The initial report (Form BPT-IN) is due two and one-half months after your LLC is formed. Subsequent reports (Form PPT) are due on or before three and one-half months after the beginning of the LLC’s taxable year.
A minimum $100 tax must be paid each year. Additional tax and regulatory requirements may apply to your LLC. These may include:
EIN: If your LLC has more than one member, it must obtain its own IRS Employer Identification Number (EIN). This is so even if it has no employees. If you form a one-member LLC, you must obtain an EIN for it only if you elect to have it taxed as a corporation instead of a sole proprietorship (disregarded entity). You may obtain an EIN by completing an online EIN application on the IRS website. There is no filing fee.
Business Licenses: Depending on its type of business and where it is located, your LLC may need to obtain other local and state business licenses. Check with the county probate office or county licensing commission for the county where your LLC office is located.
LLC Records: An LLC must keep the following records in its principal office and make them available for inspection by LLC members:
- a current list of the full name and last known business or residence street address of each member, and each manager, if any,
- a copy of the filed articles of organization and all amendments, and executed copies of any powers of attorney under which any documents have been executed,
- copies of the LLC’s federal, state, and local income tax returns and reports, if any, for the three most recent years,
- copies of any then-effective operating agreements including any amendments, and
- copies of any financial statements of the LLC for the three most recent years.
Step 7: Securing Business Licenses and /or Permits
The next step you are expected to take is to secure your business license and permits as the case may be. The type of business licenses and/or permits your LLC will need to legally operate will depend on its location and the industry it is involved in.
Please note that to operate your LLC you must comply with federal, state, and local government regulations. For example, restaurants likely need health permits, building permits, signage permits, etc. Fees for business licenses and permits will vary depending on what sort of license you are seeking to obtain.
Step 8: Taxes
Federal taxes: LLCs in most states have what’s called “pass-through” taxation. This means your LLC does not pay separate federal taxes; instead, all its profits/losses “flow through” to you and are filed with your personal tax return (Form 1040), usually on a Schedule C.
State and local taxes: In addition to your Personal Property Tax Return, your LLC may also need to file additional taxes, both at the state level and the local level (county, city, township, etc.) Depending on the nature of your business, you may be required to register for one or more forms of state tax.
Sales Tax: Since you will be selling a physical product, you’ll typically need to register for a seller’s permit. This certificate allows a business to collect sales tax on taxable sales.
Employer Taxes: If you have employees, you will have to register for the Unemployment Insurance Tax, and the Employee Withholding Tax through the Department of Labour, Licensing, and Regulation.
Step 9: Open Your LLC Bank Account
To keep your business finances apart from your finances, you should open a separate bank account for your LLC. It will indeed help you maintain your liability protection. A separate bank account helps maintain your liability protection and it also makes business accounting and taxes a lot easier.
The items needed to open an account in most states are your approved Articles of Organization, EIN Confirmation Letter from the IRS, and your driver’s license or passport. We also recommend calling the bank ahead of time to find out if additional documents are required.
Debit card: A debit card for your LLC will be issued when opening the account.
Credit card: If you want to start building business credit for your LLC (or get travel and cashback rewards), you can get a credit card or two for your LLC. We recommend using creditcards.com to find a business credit card.
Step 10: Apply and Obtain Your Business Phone Number
Instead of using your home telephone number or your cell phone, you can purchase an affordable “virtual business number” specifically for your LLC. You can set this virtual business phone up to forward to your cell phone, go through voice prompts, or configure it any way you’d like.
Getting a separate business phone number for your LLC is also a good idea to keep your actual number private from those pesky “public record” websites.
Step 11: File Your LLC Biennial Report
It is important to point out that in some states, an LLC may face fines and even automatic dissolution when they miss one or more state filings. When this happens, LLC owners risk the loss of limited liability protection. A quality registered agent service can help prevent this outcome by notifying you of upcoming filing deadlines and by submitting reports on your behalf.
Pros of Owning a Limited Liability Company for Your Clothing Line Business
LLCs Are Subject to Fewer Regulations Than Traditional Corporations
LLCs are subject to fewer regulations than traditional corporations, and thus may allow members to create a more flexible management structure than is possible with other corporate forms. As long as the LLC remains within the confines of state law, the operating agreement is responsible for the flexibility the members of the LLC have in deciding how their LLC will be governed.
State statutes typically provide automatic or “default” rules for how an LLC will be governed unless the operating agreement provides otherwise, as permitted by statute in the state where the LLC was organized.
An LLC is Treated By Default As A Pass-Through Business Entity
For U.S. federal income tax purposes, an LLC is treated by default as a pass-through entity. If there is only one member in the company, the LLC is treated as a “disregarded entity” for tax purposes (unless another tax status is elected), and an individual owner would report the LLC’s income or loss on Schedule C of his or her tax return. Thus, income from the LLC is taxed at individual tax rates.
The default tax status for LLCs with multiple members is as a partnership, which is required to report income and loss on IRS Form 1065. Under partnership tax treatment, each member of the LLC annually receives a Form K – 1 reporting the member’s distributive share of the LLC’s income or loss that is then reported on the member’s individual income tax return.
On the other hand, income from corporations is taxed twice: once at the corporate entity level and again when distributed to shareholders. Thus, more tax savings often result if a business is formed as an LLC rather than a corporation.
Choice of Tax Regime
Another advantage of having an LLC for your clothing line is that the company can elect to be taxed as a sole proprietor, partnership, S corporation, or C corporation (as long as they would otherwise qualify for such tax treatment), providing for a great deal of flexibility.
Please note that a limited liability company with multiple members that elect to be taxed as a partnership may specially allocate the members’ distributive share of income, gain, loss, deduction, or credit via the company operating agreement on a basis other than the ownership percentage of each member so long as the rules contained in Treasury Regulation (26 CFR) 1.704 – 1 are met. S corporations may not specially allocate profits, losses, and other tax items under US tax law.
Enjoys Limited Liability
Having a Limited Liability Company (an LLC) for your clothing line limits your potential liability as a business owner. For example, if a customer gets hurt using a product produced by your company or gets hurt when they are on any property owned by your company, an LLC can prevent a would-be plaintiff from going after your assets.
Some of the liabilities that LLC owners can be shielded against include Unpaid business debts (Unless you personally guarantee them), Vendor disputes (If they try to bill more than you owe), and of course Damages (especially if someone is hurt by your business or on a property you own).
Enjoys Flexible Membership
Another advantage of having a Limited Liability Company (an LLC) for your clothing line business is the fact that this form of business structure allows for flexible membership. This means that members of an LLC may include individuals, partnerships, trusts, estates, organizations, or other business entities, and most states do not limit the type or number of members.
For some business ventures, such as real estate investment, each property can be owned by a separate LLC, thereby shielding the owners and their other properties from cross-liability. LLCs in some states can be set up with just one natural person involved.
Treated as Entities Separate from Their Members
Limited Liability Companies (LLCs) in most states in the United States are treated as entities separate from their members.
However, in some jurisdictions such as Connecticut, case law has determined that owners are not required to plead facts sufficient to pierce the corporate veil and LLC members can be personally liable for the operation of the LLC. They also enjoy less risk of being “stolen” by fire-sale acquisitions (more protection against “hungry” investors).
Cons of Starting an LLC for Your Clothing Line Business
Most States Do Not Dictate Detailed Governance and Protective Provisions for The Members of an LLC
Although there is no statutory requirement for an operating agreement in most jurisdictions, members of a multiple-member LLC who operate without one may encounter problems. Unlike state laws regarding stock corporations, which are very well developed and provide for a variety of governance and protective provisions for the corporation and its shareholders
Most states do not dictate detailed governance and protective provisions for the members of a limited liability company. In the absence of such statutory provisions, members of an LLC must establish governance and protective provisions under an operating agreement or similar governing document.
Difficulty in Raising Financial Capital
It may be more difficult to raise financial capital for an LLC as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual IPO. One possible solution may be to form a new corporation and merge into it, dissolving the LLC and converting it into a corporation.
Attracts Franchise Tax
A good number of states in the US such as Alabama, California, Kentucky, New York, Pennsylvania, Tennessee, and Texas et al levy a franchise tax or capital values tax on LLCs. In essence, this franchise or business privilege tax is the fee the LLC pays the state for the benefit of limited liability.
The franchise tax can be an amount based on revenue, an amount based on profits, an amount based on the number of owners or the amount of capital employed in the state, or some combination of those factors, or simply a flat fee, as in Delaware.
Please note that effective in Texas for 2007 the franchise tax is replaced with the Texas Business Margin Tax. This is paid as tax payable = revenues minus some expenses with an apportionment factor. In most states, however, the fee is nominal and only a handful charge a tax comparable to the tax imposed on corporations.
Attracts Higher Renewal Fees
Another disadvantage of having a Limited Liability Company (LLC) for your clothing line business is that the renewal fees may also be higher. Maryland, for example, charges a stock or nonstock corporation $120 for the initial charter, and $100 for an LLC. The fee for filing the annual report the following year is $300 for the stock – corporations, and LLCs. The fee is zero for non-stock corporations.
In addition, certain states, such as New York, impose a publication requirement upon the formation of the LLC which requires that the members of the LLC publish a notice in newspapers in the geographic region where the LLC will be located that it is being formed. For LLCs located in major metropolitan areas (e.g., New York City), the cost of publication can be significant.
Unfavorable Tax Jurisdiction Outside the United States
Limited Liability Companies are confronted with unfavorable tax jurisdiction outside the United States of America.
Taxing jurisdictions outside the US are likely to treat a US LLC as a corporation, regardless of its treatment for US tax purposes—for example, a US LLC doing business outside the US or as a resident of a foreign jurisdiction. This is very likely where the country (such as Canada) does not recognize LLCs as an authorized form of business entity in that country.