A limited liability company (LLC) is, perhaps, the most popular choice of business structure for start-ups and smaller enterprises. LLCs offer the managerial flexibility, liability protection, and tax advantages small business owners need to make a success of their new venture. For a growing number of small business owners forming an LLC is the first step to realizing their entrepreneurial dream.
What is an LLC?
A limited liability company, or LLC, is a distinct type of business structure. Like a corporation, an LLC provides personal liability protection for the business’ owners in the event of a lawsuit or bankruptcy. Forming an LLC also provides valuable tax advantages for business owners, structuring the business as a pass-through entity so that the company’s income is reported on the owner’s personal tax returns and taxed at an individual rate. This allows small business owners to keep more of their profits so they can be reinvested in the company to finance its future growth.
Forming an LLC
While forming an LLC is relatively easy, it is important to point out that each state has its own unique rules and regulations regarding the establishment of a business entity. That being said, there are some administrative and compliance tasks that are common to all states. What follows is a step-by-step guide to successfully forming a limited liability company (LLC).
Step 1 – Deciding Where to Form Your LLC
Most small business owners will choose to form and register their LLC in the state in which they reside or plan to do business. However, there are times when it may make more sense to form your LLC in another state. Registration costs, tax laws, and LLC guidelines vary from state to state, and it is sometimes more advantageous to form an LLC is a state other than your own.
Keep in mind, however, that if you plan to form your LLC in a state other than the one in which you plan to do business you will have to apply for a ‘foreign LLC qualification’ in order to operate locally. This isn’t difficult, but the associated fee for registering as a foreign LLC will increase the cost of incorporation.
Step 2 – Choosing a Name for Your LLC
As a general rule the name of your LLC cannot be the same as any other business entity currently registered in your state of filing. Be prepared for any possible restrictions on specific terms (i.e. ‘city’, ‘university’ or ‘bank’) that may be imposed by state licensing agencies. These restrictions are designed to discourage businesses from giving the false impression that they are in some way associated with a licensed state entity or are doing business as a licensed financial institution. In most states you will also be required to include a business designation, such as L.L.C. or Limited Liability Co., at the end of your company name.
To learn more about your state’s LLC naming requirements check out the website of your secretary of state or dedicated government agency in charge of business registration. You should also be able to use these sites to search a database of existing businesses within the state to see whether or not the name you have chosen is available.
Keep in mind that if the name you want is available, but you are not yet ready to form an LLC, you can usually reserve the name for a short period of time by filling out the required forms and paying a one-time fee.
Step 3 – Choosing a Registered Agent
When forming an LLC you will be required to designate a ‘registered agent’. This is a person or agency residing in the same state as the business that can receive official government notifications (tax forms, legal documents, government correspondence, etc.) on behalf of the LLC and its owner(s).
A registered agent must be at least 18 years of age and must reside in the same state as the business itself. In many cases companies will designate a trusted employee or co-owner to act as the LLC’s registered agent. Some smaller companies often rely on professional registered agent services to act in this capacity.
When choosing your registered agent keep in mind that the mishandling of legal documents can lead to trouble down the line. Choose an agent or agency that fully understands their role in your business dealings.
Step 4 – Drafting an LLC Operating Agreement
An LLC Operating Agreement establishes how you intend to run your company. If you have business partners it clearly describes each partner’s financial and legal responsibilities and clearly states how all profits and losses shall be divided. It should also establish specific ground rules for admitting new members into the organization and for dealing with departing partners.
While most states do not require you to file an LLC operating agreement in order to register your business this is not a document you want to ignore. Without a comprehensive operating agreement your business can easily get mired in legal and financial troubles, particularly if one or more members of your LLC want to end the partnership. Your operating agreement should have protocols in place for any and all management, legal, and financial eventualities.
Step 5 – Preparing Articles of Organization
Articles of Organization must be filed with the state in order to establish your LLC. Again, each state has different requirements regarding what should be included in your articles of organization document, and you will want to refer to the department in your state that handles business registration and licensing. In most cases articles of organization should include the following:
- The name of the LLC
- The legal address of the LLC
- The name and address of the LLC’s registered agent or agency
- The effective date of the LLC
- The duration of the LLC
- The purpose for which the LLC is being formed (in most states this can be a general declaration of intent to do business)
- The management structure of the LLC (i.e. member-managed or manager-managed)
The person or persons forming the LLC must sign the documents prior to filing. In some states the registered agent is also required to sign the LLC’s articles of organization.
Step 6 – Filing Articles of Organization
Articles of organization must be filed with the state’s department of licensing and registration. In some instances filing can be completed online, although most states still require applicants to file in person or by mail. A filing and processing fee is due upon submission of your documents. This varies widely from state to state, and can run anywhere from $50 to $500.
It can sometimes take a few weeks for your articles of organization to be fully processed and approved. Once processing is complete you will receive paperwork certifying the establishment of your LLC.
Step 7 – Publish a Notice of Intent (Depending on Your State)
Some states require business owners to publish a notice of intent to form an LLC in their local newspapers. In most cases owners are required to publish several of these notices over a period of several weeks, and then submit an affidavit to the state licensing and filing agency as proof of compliance. Be aware that there may be additional fees associated with filing your affidavit and you will, of course, have to pay your local newspaper to print your ad/notice of intent.
Step 8 – Licenses and Permits
Once your LLC is official you can apply for your federal tax ID number and open your dedicated business bank accounts. Keep in mind that your LLC is not a license to do business. Before you open your doors to customers you will need to apply for the necessary licenses and permits as required by your state. These typically include a business or seller’s license, zoning permits and state and local ta registration certificates.
Forming an LLC is not particularly difficult, and it is a good way to protect your business and your personal assets as your company gets established in the community. However, there are no shortcuts when it comes to establishing an LLC. Take your time, and always refer to your state’s business licensing and registration bureaus to ensure that you meet all of the necessary requirements for establishing your limited liability company.