Key Takeaways:

  • Creating an LLC involves choosing a name, filing articles of organization, appointing a registered agent, and obtaining an EIN and necessary licenses.
  • Research state-specific LLC requirements, including naming restrictions, publication requirements, and ongoing compliance obligations.
  • Understand the differences between member-managed and manager-managed LLCs to choose the appropriate management structure.
  • Draft a detailed operating agreement even if it’s not required by law to prevent disputes and clarify roles.
  • Consider the tax implications and compliance responsibilities that are specific to your business type and location.
  • Some states require publication of an LLC formation notice; be aware of associated costs and steps.
  • Protect your LLC’s name and brand by checking for trademarks and securing a domain name.
  • UpCounsel can connect you with experienced attorneys to assist with LLC formation and compliance.

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 the LLC can be a disadvantage 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:

  • Insurance
  • Bank
  • City
  • Corporation

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 are 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.”

Check State-Specific LLC Naming Rules 

When determining how to create an LLC, it's critical to familiarize yourself with your state’s unique naming rules. Beyond the requirement that your name is distinguishable from other businesses, some states have additional restrictions. Certain words, such as “Bank,” “Insurance,” or “Attorney,” may require special licensing or state approval. Others prohibit words that imply the business is engaged in unlawful activities.

Additionally, check your state’s business database and conduct a search with the U.S. Patent and Trademark Office (USPTO) to ensure your desired LLC name is both available and not infringing on any existing trademarks. Reserving your LLC name before filing can also provide peace of mind during the formation process.

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 statement for the LLC and details on 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.

Registered Agent

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 the agent’s status, appointing an official representative is crucial. Failing to appoint a representative could result in penalties or the dissolution of your company.

Understand Registered Agent Requirements by State 

Registered agent rules can differ by state, making it important to confirm local guidelines. Generally, a registered agent must be a resident of the state where the LLC is formed or a business entity authorized to operate in that state. The agent must maintain a physical address (P.O. boxes are typically not allowed) and be available during standard business hours.

While you can serve as your own registered agent, hiring a professional service can provide privacy and ensure that important legal documents are received promptly. This is especially helpful for home-based businesses or those without a physical office in the state.

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.

Member-Managed vs. Manager-Managed LLCs 

Deciding how your LLC will be managed is a fundamental part of structuring your business. There are two common management structures:

  • Member-Managed LLC: All members (owners) are actively involved in day-to-day operations and decision-making.
  • Manager-Managed LLC: Members appoint one or more managers to oversee operations. Managers can be members or external individuals.

Small businesses often choose a member-managed structure for simplicity, while larger LLCs or those with passive investors may prefer a manager-managed setup. Your operating agreement should specify your chosen structure and define the roles and responsibilities of each party.

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 through this step if necessary.

Publication Requirements and Associated Costs 

Understanding state publication requirements is an important step in learning how to create an LLC. While most states do not require publication, states like New York and Arizona mandate that newly formed LLCs publish a notice of formation in an approved newspaper for a specific period (e.g., six consecutive weeks in New York).

Costs can vary significantly, from $50 to over $1,000 depending on the publication and location. Failure to comply may result in penalties or the suspension of your LLC. Contact your local county clerk’s office to verify requirements and estimate costs in your area.

Make your Business Official

Before your LLC can operate, you must obtain 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.

State and Federal Tax Considerations 

Tax obligations are an important part of operating an LLC. Depending on your business’s structure and location, you may be subject to state taxes such as franchise taxes, gross receipts taxes, or sales taxes. LLCs are typically treated as pass-through entities, meaning profits and losses flow through to the members’ personal tax returns.

However, LLCs can elect to be taxed as an S corporation or C corporation, potentially offering tax advantages depending on your situation. Consulting a tax professional can help you understand the implications and ensure compliance with state and federal tax regulations.

Administrative Duties

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.

Ongoing Compliance Requirements 

Maintaining your LLC requires staying current with state compliance obligations. Many states require LLCs to file an annual report or pay an annual fee. These reports often confirm your business address, registered agent, and management structure. Missing deadlines can lead to fines or administrative dissolution of your LLC.

Other common requirements include:

  • Maintaining accurate records of business transactions.
  • Renewing business licenses and permits as needed.
  • Updating your operating agreement if ownership or management changes.
  • Filing necessary state and federal tax returns.

Creating a compliance calendar can help you track deadlines and avoid potential issues.

Advantages

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.

Additional Benefits of LLCs 

In addition to liability protection and tax advantages, LLCs offer other valuable benefits:

  • Business Flexibility: LLCs can accommodate various business types, from sole proprietors to multi-member enterprises, without the formalities required of corporations.
  • Profit Distribution Flexibility: Members can distribute profits in a way that doesn’t strictly align with ownership percentages, allowing for customized arrangements.
  • Reduced Audit Risk: LLCs are less likely to be audited by the IRS compared to sole proprietorships.

These factors make LLCs an appealing option for entrepreneurs seeking a balance of simplicity, liability protection, and operational freedom.

Disadvantages

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.

Potential Complexities for Multi-State Operations 

If your LLC conducts business in multiple states, you may need to register as a foreign LLC in each state where you operate. This process typically involves filing paperwork, appointing a registered agent in the foreign state, and paying additional fees.

Multi-state compliance can be complex, requiring you to adhere to varying regulations and tax laws in each jurisdiction. Seeking legal guidance can help ensure you meet all requirements and avoid costly penalties.

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 do 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, also known as a “Federal Tax Identification Number,” is required by most banks 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 it is advisable to have an unbiased party review your operating agreement and other documents.

Frequently Asked Questions

1. How long does it take to create an LLC? 

The timeline varies by state, but forming an LLC can take anywhere from a few days to several weeks. Some states offer expedited processing for an additional fee.

2. Can I form an LLC in a different state from where I operate? 

Yes, but you may need to register as a foreign LLC in your home state if your business operates there. Some states, like Delaware, are popular for LLC formation due to favorable business laws.

3. What is the cost to create an LLC? 

State filing fees range from $50 to $800 or more. Additional costs may include registered agent fees, publication fees (in certain states), and legal or professional assistance.

4. Do I need an operating agreement for a single-member LLC? 

While not always legally required, an operating agreement is recommended for single-member LLCs to clarify business operations and protect the LLC’s limited liability status.

5. Can I change my LLC’s name after formation? 

Yes, you can file an amendment with your state’s LLC office to change your business name. Be sure to update your business licenses, contracts, and marketing materials accordingly.

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