Forming LLC: Everything You Need to Know
Forming an LLC can help take your business to the next level. This business structure is a popular choice based on the benefit of limited liability protection and tax-related perks. 3 min read
Forming an LLC can help take your business to the next level. This business structure is a popular choice based on the benefit of limited liability protection and tax-related perks. To form an LLC, you need to complete numerous steps. If you are ready to file as an LLC, here is what you need to know.
Limited Liability Company (LLC) Overview
For start-up businesses, forming an LLC is a smart choice. One of the main benefits is the fact that only owners are taxed, which is known as "flow through" tax treatment. This means that, unlike C-Corporations, an LLC will avoid double taxation. The owners pay taxes on the LLC's profits, but the LLC itself does need to pay taxes. Although the exact process and rules vary from state-to-state, setting up an LLC is fairly similar across the United States.
In summary, a limited liability company or "LLC" offers the protection of a corporation but the tax benefits of a sole proprietorship or partnership. The LLC can have numerous owners, none of whom will be personally liable for company debts.
Organizing an LLC
Based on its well-developed laws, Delaware is an ideal location to form an LLC. However, in the majority of cases, an LLC will be formed in the state it will be doing business. This can save fees and reduce the complexity of forming. If you plan to operate out of multiple states, you may be required to register with each state separately. To do so, you will generally file a notice with the secretary of state and then pay the related fees.
There are some requirements when selecting and filing your name, including:
- Selecting a name that ends with limited liability or LLC
- Deciding on a name that is unique from all active domestic and foreign LLCs
- The name cannot include certain words, including 'bank' and 'insurance'
- The name cannot include any mention of corporation
- A trademark search
- A thorough Internet search
In terms of sustained growth, do not select a name that would limit your business. For example, Vermont Tires LLC is not an ideal name if you plan on expanding beyond Vermont. If you plan to expand, select a name that will reflect your business long-term. You should also check the availability of your proposed ".com" name. This step is not always easy, which is why you need to put a lot of thought and due diligence into name selection.
Next, when forming an LLC, you will need to file articles of organization. This includes all relevant details, such as the name, address, owners, and location. Here are a few tips when preparing this documentation:
- The articles of organization are short and straightforward
- Select a registered agent for your LLC — this individual will receive all legal documentation
- You will need to pay a filing fee, which is generally around $100
- In some states, such as California, you will need to show if an LLC has one member or multiple members
There may be additional requirements, such as an affidavit of publication. Although response time varies from state-to-state, you can expect the LLC certificate of organization within 10 to 20 days.
Once the above steps are complete, you will then need to create an LLC operating agreement. This will include information on the members' responsibilities in regards to management, finances, and rights. It is generally recommended that you seek legal counsel during this step. Most lawyers will offer a standard form that can be tailored to meet your individual needs.
At this point, you will want to analyze any issues associated with raising money from investors. For example, investors, especially venture capital firms, will typically prefer to invest in corporations. Once you have figured out how you will secure money, you can then obtain an employer identification number (EIN). This will be required if you have any employees and will be obtained from the IRS.
This process will continue as you:
- Obtain all of the necessary business licenses
- Set up an LLC bank account
- Maintain an LLC membership ledger
- Keep current with all necessary filings
If you need help forming an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accept only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.