How to Create an LLC: Everything You Need to Know
If you want to know how to create an LLC for your business, choose an available name that conforms to LLC regulations of your state.7 min read
How to Create an LLC
If you want to know how to create an LLC for your business, choose an available name that conforms to LLC regulations of your state. From there, file a document known as articles of organization, and pay the fee which can range from $100 to $800. Once your name is chosen, you will file your articles of organization with your state’s LLC office. Paying the fee for LLC can be a disadvantage when compared to sole proprietorships or partnerships because you have to pay a fee for the articles of organization.
With that, the articles of organization form is short and simple. Other states call articles of organization a “certificate of organization” or “certificate of formation.” Draft an operating agreement that determines rights and tasks of each LLC member. Publish a notice of intent in a local newspaper to make your LLC official, but few states require this step. Secure the necessary permits and licenses to operate your business.
Choose a Name for Your LLC
The name should not be the same as another LLC in your state, and your chosen name should end with a designator in the form of “L.L.C.,” “LLC,” or “Ltd. Liability Co.” The LLC office in your state can determine if your name is already in use.
Although city rules for prohibited words vary, avoid the following words when picking your name:
Additionally, do not choose limiting words in your LLC, such as “San Francisco Tires LLC.” You can also reserve your name for a certain period until your articles of organization is filed. In addition to naming your company, ensure your name will not violate the trademark of another company. Conduct a trademark search by going to uspto.gov.
Moreover, search through the Internet to ensure that no other company is using your intended name. Further, research domain names, and try to obtain the “.com” name instead or “.net” or “.org.” Getting a desired domain name can be costly if it is already taken by another party. If you want to use another name other than your LLC in a public fashion, you may need to register a “doing business as statement” (DBA) or “fictitious business name.”
Articles of Organization
Your LLC is official when you file an “Articles of Organization” with the Secretary of State’s office. The form should include the name of the LLC, the names of the owners, members and the address of the business. Also, you need a mission statements for the LLC, and how the organization will be managed. Certain states require you to name a primary manager, such as “one manager,” “all limited liability company member(s) or “more than one manager.” The owners can either sign the document individually or appoint a single person to sign it.
You also need to nominate a “registered agent,” or “agent for service of process,” within your LLC.
This person would receive any legal papers stemming from possible lawsuits in the future. Further, an agent is authorized to accept other vital documents on the LLC’s behalf. Your state may allow the LLC itself to act as a registered agent, so long as your company has a physical address in the state. Regardless of agent status, appointing an official representative is crucial. Failing to appoint a representative could result in penalties or the loss of your company.
Create an LLC Operating Agreement
Operating agreements are not mandatory in most cases, but it is an essential document. An OA outlines the function of your business and the role of each member in the same way as corporate bylaws or a partnership agreement. An OA also protects your LLC structure if your company is challenged in court, and you would not have to default to state operating rules.
A well-drafted OA should include the following:
- Equity percentage of the LLC
- Outcomes if a member wishes to sell their share, becomes impaired or dies
- Rights and responsibilities
- Voting power of each member
- Allocation of stocks and liquidation among owners.
- Procedures for meetings, votes and dissolution
- Guidelines for meeting and rendering votes
- Managerial structure, member roles and appointment of officers
- Buy/sell guidelines
- How profit is to be distributed among members
- Name any restrictions on the transfer of LLC interests or “units.”
Further, an OA also determines capital contributions of each member, when the contributions should be satisfied and the penalties if the contributions are not met. Most importantly, the document should name indemnification protection measures for any manager operating the LLC.
Publish a Notice
Some state officials require you to publish a notice in a newspaper because they want you to announce your intention to establish an LLC. Arizona and New York have such requirements. You will also be required to publish the announcement several times in a succession of weeks and submit an ”affidavit of publication” to the LLC office. A local newspaper can guide you in this step if necessary.
Make your Business Official
Before your LLC can operate, you must obtain to the necessary licenses and permits. For instance, you may need a business license or a “tax registration certificate.” Check with your local county regarding zoning, ordinances and business licenses.
Most states do not require formal administrative duties or annual paperwork, but procedures should be established with your organization to preserve the integrity of your LLC. With that, other states charge annual taxes and fees, which can place LLC holders at a disadvantage. For instance, California taxes anywhere from $900 to $11,760 on annual income over $250,000, including an $800 annual tax for LLCs.
However, the advantages outweigh the disadvantages when compared to general partnerships, corporations, or sole-proprietorships:
Pass-through taxation: Profits and losses pass through the LLC to individual owners who can record profits and losses on their tax returns, allowing members to pay less taxes. Authorities do not levy business taxes on LLCs. Only LLC owners are taxed unless there is a voluntary contrary election.
Absolved of Responsibility: Owners do not absorb LLC liabilities and debts.
Creditor Protections: Creditors are unable to lobby for the personal assets of LLC owners to satisfy debts. Sole-proprietorships and general partnerships are not afforded the same protections.
Credibility: An LLC creates trust and credibility with potential clients, partners, vendors, customers and employees.
Limited Paperwork: LLCs face fewer annual regulations and other requirements when compared to S and C corporations.
Flexible Structure: LLCs have more flexibility in management structure and are free to create any organization system as agreed to by the owners. Further, LLCs are managed by members instead of corporations, which have managers who make day-to-day decisions and answer to a board of directors.
Owner Numbers: There are fewer restrictions on how one can be an owner, including how many owners, when compared to S corporations.
There are a number of disadvantages with LLCs:
Expenses: LLCs may encounter ongoing business expenses as the operation continues, and states may impose routine fees and franchise taxes.
Price Difference: LLC formation is expensive compared to general partnerships and sole-proprietorships, and these entities do not have to file paperwork with authorities.
Costly Publications: The cost can be expensive in states where you need to publish the formation of your LLC in local newspapers.
Transfer Difficulties: Ownerships transfer within an LLC can be more difficult than corporate status.
Less Flexibility: All owners must approve the addition of new owners or any changes in the equity of current owns.
New Phenomenon: Since LLCs are a relatively recent creation, there is not much legal precedent as corporate entities.
Talk with an accountant or attorney for questions regarding the best structure for your business.
Issues in LLC
Despite some drawbacks, an LLC is a popular business decision for many startup owners. LLCs fall under the umbrella of state law and provide limited liability protection to members. A lawyer does not need to help you set up an LLC, but legal counsel can be useful in regards to outside investment or multiple owners. Additionally, there are many online websites that will help you prepare the necessary paperwork.
However, you must first choose where your LLC will be located. For instance, Delaware is chosen by many owners due to the state’s lucrative business laws. With that, you should file your LLC in the state where you intend to business. If you intend to operate in multiple states, you should establish an LLC in each state where you will conduct business. This includes filing documents with the Secretary of State for each state.
Analyze the Issues of Raising Money from Investors
If you need to raise money, keep in mind that many investors would prefer to invest in corporations instead of LLCs. Unit allocation to investors would require the involvement of state and federal securities officials. Seek legal advice to take advantage of “private placement exemption” to avoid extensive filing measures.
A private placement exemption exempts a business from registering with the Securities and Exchange Commission (SEC). Reputable investors should be aware of the risks involved with investment and should present accreditation and awareness of the risks. Any duties of an investor should be set forth in the articles of organization or investor rights document.
Obtain an Employer Identification Number
An EIN is also known as a “Federal Tax Identification Number.” Most banks need an EIN before opening a business account. To get an EIN, visit the IRS website. The process is free, and you can get the number in a short amount of time.
Obtain the Necessary Business Licenses
The nature of your business depends on the licenses you need. To use an example, you’ll need a federal license if you intend to sell firearms, and you need a state license to sell alcohol. Local cities require a standard business license to operate in a certain area. Hiring a lawyer is not necessary to establish an LLC, but you should have an unbiased party read over your operating agreement and other documents.
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