How to Become an LLC: Everything You Need to Know
How to become an LLC includes a series of steps you must take to form a limited liability company in your state.3 min read
How to become an LLC includes a series of steps you must take to form a limited liability company in your state. A limited liability company (LLC) is a popular small business entity because of the ease of establishment, the legal protection for personal assets, and the lack of formal requirements, such as meetings and boards of directors.
The rules for LLC formation are different for each state, but they are generally similar. This process can often be completed in less than an hour.
Choosing an LLC Name
You must follow the LLC naming rules set out by your state of establishment:
- The name cannot be the same as that of another registered LLC in the state.
- The name must include either the words "limited liability company" or the abbreviations "LLC" or "L.L.C."
- The name cannot include certain state-prohibited words, such as "insurance," "bank," "city," or "corporation."
The state will check if your proposed name is available when you register your application. However, you should check whether the name is available before filing your LLC paperwork, since a similar name means your application will be rejected.
If the name you want is available, you can often reserve the name for several months while you prepare your articles of organization. The availability, reservation length, and fees for this service vary by state. You must ensure the proposed name for your LLC doesn't infringe on the trademark of another business.
Filing Articles of Organization
Most states call the formation documents for your LLC the articles of organization, certificate of organization, or certificate of formation. These documents carry a filing fee ranging from $50 to $800, depending on your state.
Articles of organization are simple forms that request basic information about your business. This includes:
- The name and address of your LLC
- The names of all members
You can have the document signed by all the owners or appoint one member to serve as the signor.
The articles of organization will also ask for the name and address of your registered agent. This person must live in the state and agree to accept legal documents and service of process on behalf of the LLC. This can be an LLC member or a hired professional service.
Creating the Operating Agreement
An operating agreement is not usually required by state law. However, creating one is a smart move if your LLC has more than one member. This legally binding document details the rules for owning and operating the LLC. Your operating agreement should indicate:
- The names of each member, along with his or her roles, rights, and responsibilities
- Each member's ownership percentage
- Each member's voting power
- Allocation of profits and losses
- Management structure
- Meeting and voting guidelines
- Buy-sell provisions
In some states, you'll be required to publish a notice about the formation of your LLC in local papers, as designated by the LLC filing office for a specified length of time. You submit the affidavit of publication to the office along with your articles of organization.
Obtaining Business Permits and Licenses
Although your LLC is official once you complete the above steps, you may also need licenses or permits to operate in your state, municipality, or industry. Examples include:
Most small businesses should establish themselves in the state where they'll primarily be doing business. However, it may be advantageous to register in a different state for tax reasons.
If your LLC does business in other states, you may need to register as a foreign entity in those states. This typically requires filing paperwork similar to the articles of organization.
Benefits of an LLC
Many small business owners choose to form an LLC to take advantage of personal liability protection and beneficial pass-through taxation. This means the profits and losses of the business are reported on the members' individual tax returns. This prevents the double taxation of corporations, which are taxed at the corporate level when profits are earned and again at the individual level when they are distributed to members. In addition, forming an LLC protects your personal assets from the liabilities and debts of the business.
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