How to Form a LLC: Everything You Need to Know
Wondering how to form a LLC? Every new LLC must file an Articles of Organization with the Secretary of State's office and pay the filing fee.4 min read
Wondering how to form a LLC? Every new limited liability company (LLC) must file an Articles of Organization with the Secretary of State's office and pay the filing fee, which can range from $30 to $200. Some states may require additional registration steps, but you can view your area's specific rules on your Secretary of State's website.
How to Form an LLC in Your State
Aside from filing your Articles of Organization, you should draft an LLC Operating Agreement. This step isn't required by law, but it's a good way to outline the details of your business arrangement, including each member's role, ownership percentage, responsibilities, and rights.
Most states don't require annual paperwork or specific administrative procedures. Even so, establishing some formal procedures, such as meeting once per year, is beneficial to any business.
In some cases, you may be subject to annual taxes on top of your state's filing fee, although this is rare. California, for instance, charges an $800 yearly tax for LLCs. In these states where your business is hit with annual taxes and fees, you may want to rethink the economic viability of choosing an LLC business structure.
Despite a few drawbacks, an LLC has many advantages over other types of entities, including:
- Pass-through taxation – profits and losses pass onto individuals who own the business who then report the information on their own tax returns; the business itself is not taxed
- Owners (who are referred to as LLC “members”) are not personally responsible for the company's liabilities and debts
Steps to Form an LLC
1. Choose a Name
Once you've decided to establish an LLC, you need to choose its name. The name of your business must comply with your state's LLC naming rules. Typically, this means that your LLC name:
- Must end with an LLC designator, such as “LLC,” “L.L.C.,” or “Limited Liability Company”
- Cannot include prohibited words, such as “bank,” “city,” “corporation,” or “insurance”
- Cannot be the same or similar to another LLC name on file with the state's LLC office
The main portion of your LLC name is flexible, so be creative and choose something unique. Once you've selected your business name, the LLC office will determine if it's available for use. You can also reserve the name for a limited time, ensuring your name is available when you're ready to file your Articles of Organization.
2. File an Articles of Organization
Now that you've chosen a suitable name for your business, it's time to file your Articles of Organization. You can obtain the Articles of Organization form on your Secretary of State's website or at the physical office. When you get the form, contact them to see if you need to publish a notice in the newspaper, as some states require it.
In some cases, your state may refer to an Articles of Organization as a Certificate of Formation or a Certificate of Organization. These are the same document. You can complete your Articles of Organization in minutes simply by filling in the blanks and ticking a few boxes.
In general, you must provide:
- The LLC's name
- The LLC's address
- The names of every owner/member
- Member signatures
- The name and contact information of your registered agent
A registered agent is someone your business has designated to receive legal documents in the event of a lawsuit involving your LLC.
3. Draft an Operating Agreement
While you don't need to file an Operating Agreement with the LLC office, you should still create one. The Operating Agreement outlines ownership rules, operation details, and other pertinent information regarding your business.
Your Operating Agreement might include details about:
- Members' voting power
- Member's business interest percentages
- Member rights and responsibilities
- Rules for taking votes and holding meetings
- Buy-sell provisions if a member dies or wants to sell their share
- How profits and losses are allocated
4. Publish a Notice
If your state requires you to publish a notice of intent, you must do so in your local newspaper. This publication states your intent to form an LLC. You may need to publish this notice several times over a set period and then submit an affidavit of publication to your LLC office.
5. Secure Your Licenses and Permits
Now that you've completed the above steps, you can obtain your business license and necessary permits. For example, you may need to get a tax registration certificate, a seller's permit, a zoning permit, and a federal employer identification number (EIN).
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