While most teenagers want to study, hang out and watch movies, some teens want to build a business. There are a variety of young entrepreneurs around the world, app builders, competitive champions, reselling clothes, and more. The entrepreneurial spirit has no age limit. An estimated 41% of teenagers say they’d prefer to start a business rather than work for a boss (according to a survey by Junior Achievement). You can succeed in business at any age, and today’s teens have grown up with a wealth of technology that can be used to network, build their careers and make money. But it can be more complicated to form a business when you’re underage. Let’s take a look at the rules and legislation surrounding this issue.
What is an LLC?
A limited liability company is a business structure that mixes elements of general partnerships, corporations, and sole proprietorships, giving you the best of both worlds.
LLCs are usually taxed like general partnerships and sole proprietorships; with the IRS taxing you on your personal tax return, the LLC doesn’t owe income taxes. LLCs may be taxed like a corporation by registering for S-corporation status, but this isn’t very common. In a limited liability company, the owners aren’t liable for any debts incurred by the LLC, keeping your personal assets much safer from a lawsuit. You should take steps to ensure that you keep your personal and business finances separated.
How to form an LLC
Once you’ve decided on the type of business your startup will be, you can form your LLC. There are several things you should consider before you start an LLC.
- Your LLC business name
- What state you’ll incorporate your business entity in
- Your LLC owners
- Choosing a registered agent
- Your LLC operating agreement
There are a variety of professional services that you can use, for a modest fee + state fee. Basic filing fees vary depending on where you’re located. In some states, it’s a legal requirement for at least one member of the LLC, or the organizer, to be over 18. We cover this in more detail later on.
Registered agents are another legal requirement, and many small business owners rely on a registered agent service (providing a physical address for a modest fee). A registered agent service provides you with privacy and peace of mind. Some formation services will offer this service plus additional services, like annual report management and management of your formation documents for your new business. Your operating agreement and article of organization will outline the management structure and several key parts of your business.
But before you can worry about forming your new business, you should consult state law, particularly LLC laws, to ensure there’s no objection to you forming an LLC as a minor.
Can a minor form an LLC?
Unfortunately, most states require young entrepreneurs to be at least 18 years old before they can form an LLC. However, you can sometimes work around this. Some states have more flexible laws. California, Nevada, Delaware, and Wyoming don’t stipulate a minimum age for you to form an LLC. Therefore, it’s ideal to review the specific rules your local Secretary of State’s office decided. But even if your state doesn’t support LLC formation, there are a number of alternatives.
Though some states prohibit minors from forming an LLC on their own, there aren’t laws that prevent you from being a partner of the business. That means if you have someone who can act as a business partner (over 18), they can be responsible for LLC formation, operation, and the daily tasks you’re not legally able to complete. You can draft and sign a partnership agreement to avoid any confusion or conflict later.
Incorporating in another state
You don’t need to live in another state to incorporate there. Delaware is one of the corporate-friendly states; more than half of all corporations are registered in Delaware but do business and are headquartered elsewhere. You can file the Articles of Incorporation in a state like California or Delaware and, following approval, register with the state where your business will be physically located. Registering an LLC in a state other than your own is a bit different, though. The registration process varies and may be called something else, such as a Certificate of Authority or Foreign Qualification.
There are no age limits for LLC members. If you have someone trustworthy over the age of 18 (which can be a relative, parent, or your attorney), you can serve as a member of an LLC while they are the organizer. In this type of structure, it would be wise to consult an attorney for legal advice and get an Operating Agreement that clearly defines the organizer’s and member’s roles. This prevents the organizer from keeping control of the organization even once you’ve turned 18.
Managing contracts as a minor
Business contracts and legal documentation are common features for most business owners; they are essential to running successful businesses that protect you and your assets. However, if you’re a teenage business owner, most contracts signed by you are not legally binding. Most states don’t allow teenagers/minors to enter binding agreements as they aren’t considered legally competent.
The day-to-day tasks of doing business are pretty much impossible if you can’t sign a legally binding contract, this is solved by having a family member, guardian, or attorney as your business partner or organizer, as they can sign contracts on your behalf.
Most businesses will need a bank account, and it’s crucial that you keep your personal and business finances separate. Most banks won’t allow a minor to open a business account. Getting a business partner/parent or guardian to act on your behalf may help you solve this hurdle.
Forming an LLC increases your business’s credibility, makes it easier to acquire funding, and protects your assets. It may seem unnecessary to form an LLC, but it warrants consideration if you’re serious about being in business for the long haul.
One of the easiest ways to form an LLC is to incorporate in a teen-friendly state, alongside having a trusted guardian or attorney on hand to deal with contracts, formation issues, and other possible issues that crop up.