Forming a LLC: Everything You Need to Know
Forming an LLC is a relatively simple process, only requiring filing the correct formation documents and paying any fees that are required in your state.3 min read
Forming an LLC is a relatively simple process, only requiring filing the correct formation documents and paying any fees that are required in your state.
What is an LLC?
A limited liability company (LLC) is a popular type of business structure. Separating your personal assets from those of your business is the most beneficial reason for forming an LLC. If you form your LLC correctly and make certain to comply with LLC rules in your state, you can protect your personal property from being pursued in your business liabilities.
LLCs are also extremely flexible in how they are run, who can be owners and the taxes to which they are subject. Forming an LLC means that your business will be structured like a partnership while offering the personal asset protection of corporations.
Steps for Forming an LLC
Many people resist forming an LLC because they believe that the formation process will be too complicated. Fortunately, this is not the case. The steps to forming your LLC are actually very simple, and once complete, your LLC will be a legal entity.
The initial step you will need to take is finding an available name for your company. This means the name cannot be in use by another company and conforms with state LLC naming requirements. Regardless of the state where you form your LLC, there will be unique naming conventions that you will need to follow. You can find the naming rules in your state by contacting the agency that governs corporations and limited liability companies.
Some of the basic rules for naming your LLC include:
- Choosing a wholly original name that is in no way similar to the names of other registered companies.
- Including a designator such as “LLC” or “Ltd.” that indicates the status of your company.
- Refraining from using prohibited words such as “Corporation.”
You cannot use a name that has the potential to infringe upon another company's registered trademark. The LLC office in your state can help you discover whether the name you have selected is eligible for use.
After picking out an available LLC name, you will need to prepare Articles of Organization and then file this document with your state. Other names for Articles of Organization include:
- Certificate of Organization.
- Certificate of Formation.
Using a template is a popular choice for completing your Articles of Organization. It's important that your Articles of Organization describe the management structure that you have selected for your LLC. In particular, you need to detail whether your LLC members will manage your company or if you will hire an outside manager or team of managers to fulfill these duties.
Your Articles of Organization must also include information about how long you plan for your LLC to exist. Although LLCs can last forever, you may want to choose an end date for your company. Generally, Articles of Organization are very easy to fill out, and should only require a few minutes of your time. However, to make sure your Articles are filled out and submitted correctly, you may wish to seek help from an attorney.
In addition to the aforementioned information, you must also include:
- The company's chosen name.
- The address of your limited liability company.
- The names of all your LLC members.
The owners of your LLC have the right to prepare your Articles of Organization. However, you can also appoint a single person to handle this important task.
The fees for forming an LLC are usually very affordable, with a typical cost of $100. In some states, however, your costs can be much higher. If you form your LLC in California, you must pay an $800 annual tax in addition to your LLC filing fee.
Most states require that LLCs have a registered agent, which is a person designated to accept legal documents on your business's behalf.
You should also have an operating agreement, which is a document that will discuss how your company will be managed and will also describe member rights. Operating agreements are essential, even though state law will normally not require them. Information you should add to your operating agreement includes:
- The ownership percentages of LLC members.
- LLC members' responsibilities and rights.
- Voting powers of LLC members.
- The process for distributing losses and profits.
- The management structure of your company.
- Steps for taking member votes and holding meetings.
- Provisions for buying or selling membership interests.
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