Creating a LLC: Everything You Need to Know
Creating a LLC follows different rules and steps in each state. 6 min read
Creating a LLC
Creating a LLC follows different rules and steps in each state. There are a number of different rules for how LLCs must be named – make sure you check your state’s LLC rules before choosing your name. Names that may lead other to believe your company is associated with a government body or a bank are probably off-limits.
You also cannot choose a name that has already been taken, or that is extremely similar to the name of an existing LLC because this would violate federal trademark law. Most states will require that the name of your LLC ends with an abbreviation designating the company’s status as an Limited Liability Company, such as “LLC” or “Ltd. Liability Co.”
You should conduct an internet search, and perhaps a federal Trademark search, to ensure that your chosen name is available and to make sure you can get a favorable internet domain name. If you plan on using a different name than your formal LLC name for advertising purposes, some states will require you to make a special filing notifying the state of that (usually called a “Doing Business As” notice).
Finally, take the time to carefully think about your LLC name from a business standpoint. Pick a name that reflects you and your business well.
The Secretary of State in your state or your state’s LLC office can let you know if your chosen name is available and acceptable. Some states will even let you pay a fee to reserve a name until you are ready to file your Articles of Organization. Once you file Articles of Organization, assuming the state accepts it, your organization will be an LLC.
File Articles of Organization
Articles of Organization are the notice you file with the state of your intention to form an LLC. Each state has different requirements for exactly what must be included in the Articles of Organization, but they are simple documents to prepare. At the very least you must include your name, the name of the LLC, and contact information for both.
Filing Fees for an LLC
LLCs cost more than partnerships and sole proprietorships because there are filing fees involved. These fees range from a $100 to nearly a thousand depending on the state. However, LLCs are still a much cheaper option than incorporation.
Required Information for Creating an LLC
All that is required to form an LLC are Articles of Organization. As mentioned, this is a simple document that does not require a lot of information, usually only the names of Members, the name of the LLC, and contact information for both. Some states also require that a registered agent be listed in the Articles, that a statement of purpose be given, or that the management structure be outlined.
Many states will have an online form that can be filled out. Most business owners and entrepreneurs can set up an LLC on their own, but it is a good idea to have a locally-barred attorney look over filings first.
Registered Agent for an LLC
In most states, an LLC needs to have a “registered agent” that acts as the legal representative of the LLC. This is the person that is entrusted to receive legal papers on behalf of the LLC.
Create an LLC Operating Agreement
Operating Agreements are not required in most states, but these documents are essential for LLCs. An Operating Agreement establishes how an LLC will be managed and describes the ownership rights of each of the Members. The Operating Agreement can also set out what happens in the event that a Member wants to leave the LLC or sell some of his ownership interest, the voting rights of the Members, any restrictions on transfer of ownership, the dissolution date of the LLC is any, procedures for meetings, and any other set of internal rules that the Members want to agree to.
Publish a Notice (Some States Only)
Some states require LLCs to publish a public notice stating the intent of the owners to form an LLC. This can usually be accomplished by simply publishing a notice in the local newspaper several times, and then filing an “Affidavit of Public Notice” with the state.
Get Licenses and Permits
Aside from getting your LLC set-up, you need to take steps to make sure that your business is operating legally. States and municipalities have licensing and permitting regulations that must be followed. The type of business you have will determine what licenses and permits you need to get.
Usually, when LLCs are established, they must get a business license from the city and/or county they are located in or doing business in.
Members of an LLC have wide freedom to manage and structure an LLC as they see fit. Unlike with corporations, there are few formal requirements. But even though most states don’t require an LLC to keep records or file annual paperwork, LLC Members should nonetheless keep careful documentation of LLC events and finances.
Because LLCs are “pass through” entities, the LLC does not itself pay taxes. Instead, Members owe taxes for LLC profits on their own individual taxes. But LLCs are still legally separate entities, and therefore Members are not usually individually liable for the LLC’s debts.
There are many large benefits to the LLC. Sole proprietorships and partnerships are cheaper and easier to create, but neither protects individuals from personal liability for company debts. The LLC does. This means that creditors cannot go after LLC Members’ personal assets when the LLC owes money.
Heightened Credibility for an LLC
Potential customers, vendors, partners, and investors may view an LLC as more credible than a sole proprietorship as they can see that you’ve made an official commitment to your business.
Limited Compliance Requirements for an LLC
There are far fewer rules, restrictions, and regulations that are imposed on LLCs when compared to corporations.
Flexible Management Structure for an LLC
Because there are fewer rules governing LLCs, they are much more flexible in how they can be managed. Members can be directly involved in the management, or they can hire or appoint others to handle the management. In some LLCs, there are Members that act as managers, and other Members that do not. Any organizational structure that Members agree to can be enshrined in the Operating Agreement and carried out.
Formation and Ongoing Expenses for an LLC
The expense of maintaining an LLC is less than a corporation, but there are still annual fees involved. Some states, such as California, also impose “franchise fees” on LLCs that can be hundreds of dollars per year.
Transferable Ownership for an LLC
With a corporation, owners can divest by simply selling their stock. Transferring ownership in an LLC is more difficult. The exact mechanism by which a Member can sell ownership or leave the LLC should be spelled out in the Operating Agreement.
Pick the State Where You Want to Organize the LLC
LLCs are recognized and formed according to state law. Because each state has different fees and laws, it is important to think carefully about what state would be best to legally place your LLC. The state that your business will be located is not necessarily the best choice. For instance, it is well accepted that Delaware has the most corporate-friendly law, and this includes LLC laws. That is why larger LLCs that want to mitigate risk often consider Delaware their first choice.
It can also reduce legal risks to register your LLC in every state that you will be doing business. This isn’t necessary, but if it is something your business can afford it is sometimes worth it.
Analyze the Issues of Raising Money from Investors
Because stocks are easier to buy and sell, many investors prefer to put their money into corporations rather than LLCs. Moreover, investments in LLCs are subject to their own set of federal securities laws. Any LLC soliciting investment should make sure investors are aware of the laws. It is a good practice to establish what the investor rights are in the Articles of Organization. At the very least, investors should sign an investor’s rights agreement before making the investment to avoid disputes and confusion later.
Obtain an Employer Identification Number
In order for the LLC to have employees, including paying Members any type of salary, it must obtain an Employer Identification Number (EIN) from the IRS. An EIN is typically required for an LLC to have a bank account as well.
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