How to Create a LLC: Everything You Need to Know
It's not as hard as you might think to start an LLC, but you need to follow the required procedure to form it legally.3 min read
Knowing how to create an LLC is the first step in starting this type of business entity. A limited liability company (LLC) allows business owners to take advantage of the benefits of both a corporation and a partnership or sole proprietorship. Corporation benefits include limited liability protection, while partnerships and sole proprietorships offer more flexible and beneficial taxation.
An LLC can have one owner or many owners, called members. Those members have limited personal responsibility for business liabilities or debts, which is similar to the protection held by owners of a corporation. However, the business income of a corporation is subject to double taxation, while an LLC is a pass-through entity, eliminating double taxation.
In the last few years, the LLC structure has become the most popular among small business owners who want to incorporate. Specific requirements for setting up an LLC will vary among states, but overall, it's a simple process that typically can be done in about an hour or less. If your organizational structure is more complex, it can be a bit more challenging.
It's not as hard as you might think to start an LLC, but you need to follow the required procedure to form it legally. These steps include:
- Selecting a name for the business that meets the regulations and rules outlined by the state
- Filing the articles of organization and paying the required filing fee, which is usually between $100 and $800
- Drafting and implementing an operating agreement for the LLC, which outlines the responsibilities and rights of all members
- Obtaining any required permits and licenses to run your business
- Publishing a notice of the intent to create an LLC (if required in your state)
Choosing a Name for Your LLC
When you think about what name you'd like for your LLC, the first step is reviewing the rules for LLC naming in your state. You can typically find these rules with the LLC Division of the Secretary of State's office, which might be combined with the Division of Corporations.
Although each state has its own requirements, some general rules apply:
- Your LLC name must be distinguishable and unique from any other LLC operating in the state
- The name can't include restricted words, such as city, bank, corporation, insurance, or any other state-specific word
- Your LLC name must end with LLC, Limited Liability Company, L.L.C., Ltd. Liability Co., or Limited Company
The LLC office within your state will provide directions on how to search existing names and determine if the name you want is available. You might be able to reserve an LLC name for a set period of time before you can file the articles of organization. This generally requires payment of a small fee.
File Articles of Organization
The next step in forming an LLC is preparing and filing your articles of organization. These will be filed with the secretary of state's office in most states. This is the basic document that every state requires to start an LLC, although you might hear it called a certificate of formation or certificate of organization.
When you form an LLC, you must pay the required filing fee when submitting the articles of organization. The fee is not required of businesses formed as sole proprietorships or partnerships, so it is a disadvantage of this business structure. Generally, the filing fee is around $100, but in California, the state requires payment of $800 in annual taxes in addition to the filing fee.
Your LLC's articles of organization should be simple and short. Most business owners can prepare their own with the sample form available through the LLC filing office. The articles should include the names of all members, the name of the business, and the business address. The members can work together to prepare the articles and have each member sign them, or simply choose one member to prepare and sign the document.
In most states, a registered agent must be appointed by the LLC. This person, also called the agent for service of process, can be a member of the LLC. The articles of organization should include the name and address of the registered agent, who is the person designated to handle and receive any legal documents on behalf of the business.
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