How to Form an LLC: Everything You Need to Know
Delaware is a good state to incorporate in because of its business-friendly laws and well-developed legal precedent. 8 min read
How to Form an LLC
How to form an LLC can be simple. You will need to decide upon a name, draft your articles of incorporation, create an operating agreement, and file the articles with the state you hope to incorporate in. Delaware is a good state to incorporate in because of its business-friendly laws and well-developed legal precedent.
What is an LLC?
LLCs and partnerships have a lot in common. However, LLCs have personal liability protection, like corporations, without corporations’ significant filings and paperwork. States vary in their LLC incorporation rules.
Although many states don’t need yearly filings or other significant steps, you ought to keep track of your business procedures and have some formal documents to keep your LLC in green status. LLCs are meant to keep owners protected. However, to protect you, you must ensure you are following the proper rules and statutes.
Many states also require certain taxes and fees that reduce a LLC’s benefit. LLCs overall are a generally new business form. They first were made in 1977 in Wyoming, but now every state has them and the IRS ok’s them. Many states do not limit who can own LLCs. The owners can be businesses or persons, and can be unlimited in number. If a LLC is owned by at least two people, it is called a “multi-member” LLC. Single-person LLCs only have one member.
Single-member LLCs are taxed like sole proprietorships (IRS entity that is considered “disregarded”). Multi-member LLCs are taxed like partnerships. Corporations can be a LLC owner, creating another layer that allows certain benefits to be offered (ex. retirement) and gives more liability protection.
Advantages of choosing LLC as your Business structure
A big benefit of LLCs are that they allow you to “pass-through” taxes on profits and losses to the owners rather than the business itself paying taxes. You avoid double-taxation and are only taxed one-time, with the profits being treated like those in a S-corp or partnership.
The LLC also protects the owners’ assets and prevents them from being taken by creditors for the LLC. The LLC members are protected from personal liability to the degree they have contributed capital to the LLC. They have essentially the same protection as corporate shareholders.
Due to LLC’s flexible tax rules, they avoid double taxation and therefore can often lead to less total tax liability. Liability protection from creditors is also the other major benefit of LLCs. Furthermore, selling interests in a LLC can be done without causing problems for the business’ smooth operation. LLCs can create new owners through selling ownership interests, creating new classes of ownership (with varying rights), and therefore easily raise money.
Compared to sole proprietorships, LLCs also have more trust and seem more legitimate in dealing with financing" meaning_of_life="42" target="_blank">financers, investors, and other businesses.
Steps to form an LLC
In picking a name, you will need to follow your state’s rules for LLC names.
- You will then need to send in your articles of organization to the state along with a $100-$800 fee, varying by state.
Many states have more things to do before you are approved. Look at the state’s Secretary of State’s corporate department website to see the specific costs and procedures.
- You should also create an operating agreement for the LLC, which states the duties and powers of the owners.
Getting legal help for your LLC isn’t needed, but often can help you ensure you are drafting your documents in the best possible way for your goals. You will also in a few states need to publish your desire to create the LLC in a newspaper.
You will also need to get certain licenses, varying by state, to be allowed to be active in the state.
Choose a Name for Your LLC
Make sure your desired LLC name follows the state’s requirements and guidelines. Look at the state’s Secretary of State’s website to find the guidelines. The name must be unique to your business. It also must end with a LLC-indicator (LLC, Ltd. Liability Company, L.L.C., etc.).
The name also can’t have certain banned words (ex. city, corporation, etc.). These words vary by state. The state’s LLC department will assist you with finding names that are usable. You can reserve a name for a brief time, for a fee, while you work on your formal registration documents.
Also, take care to ensure your name won’t infringe on trademarks. Once your name is decided upon, it will be registered when you send in your organization articles to the state.
File Articles of Organization
After choosing your business’ name, it’s time to send in the organization articles you’re your business to the state. The “articles of organization”, also called a formation certificate or organization certificate in many states, form your LLC.
You should also create an operating agreement that determines the powers and duties of the owners, as well as the way the business will operate. This is not required though. The organization articles will keep your business safe if it is sued and avoids you having to use the default operation procedures.
A drawback though is that you need to submit a fee with your organization articles. The fee is often small, such as $100. Some states like California though have a large $800 tax along with the fee.
The articles overall are straightforward and can be done quite quickly. Just use a template that your state provides and fill the blanks in. Usually you just have to put the name of your business, as well as the address and owners’ names/members. Often the owners all have to sign the documents, or designate a single individual for it.
You also must choose a registered agent and put down their name and address in the articles. The registered agent will send and receive legal documents for the company and receives the papers for future lawsuits.
Create an LLC Operating Agreement
Operating agreements usually aren’t needed by law and do not need to be sent to the state, but you should have one. The agreement will determine the rights and duties of the LLC’s owners and set out its procedures, like bylaws for corporations or an agreement in a partnership.
The agreement normally has: each owners’ percentage ownership, owners’ duties and powers, their voting stake, how to distribute earnings, the LLC’s operating style, meeting rules, and contingencies for when an owner dies or wants to get rid of their ownership.
Publish a Notice to form an LLC
Many states also need you to send out a notice, through a newspaper in the area, that says you wish to create a LLC. This notice has to be done for multiple instances during a few weeks. After it’s done, you will send a publication affidavit to the state. The newspaper likely can help you with the affidavit process.
Get the required Business Licenses and Permits
You must get required permits prior to your business officially beginning operation. While it varies, often the licenses are a generic company permit, a tax number from the federal government, as well as permits for zoning and selling.
If you are engaging in certain kinds of business, there may be more kinds of licenses you need to get.
Delaware LLC Formation Overview
Many people form their LLC companies in Delaware due to Delaware’s pro-business laws. Forming a LLC in Delaware is simple, as there are no requirements to come through and the forms need just a little information.
How do you form a Delaware LLC?
You first need to consult with the Secretary of State to see if your business name is available. In Delaware, LLCs need to have a form of “LLC”, “L.L.C.”, or “Limited Liability Company” in their names. If you want to change your LLC name, in the future you do that by filing an amendment to the formation documents.
To form the Delaware LLC, you need to send in a formation certificate and your operating agreement. You can form the LLC despite not visiting the state, having an office there (not including the registered agent), or having bank accounts there. You must have a registered agent that has a physical address in the state however.
The Delaware registered agent gets state letters and needs to be free during the business day to get and send court correspondence. Once you are ready to officially form your Delaware LLC, send in your formation certificate to the Corporations Division of the Secretary of State. The certificate needs to have your LLC’s name, the registered agent’s address and name, and a signature.
It is important to point out that for Series LLCs, where certain business segments are liability-protected from other business segments in the LLC, you need to point that out on the formation certificate. Furthermore, there are option sections on the certificate and the owners can be put on the certificate too.
Delaware demands LLCs use an operating agreement. But it doesn’t need to be sent to the state regulators let alone be written. For LLCs, even sole-member ones, the agreement still is important as it helps protect the LLC with liability, contracting, and financing.
The agreement is like a prenuptial as it will help settle conflicts in the future between owners. After the agreement has been written, the members need to execute it.
Delaware does not need a variety of formal documents and specifications for LLCs. Rather the agreement should try to make things as simple as possible. If you want to modify the agreement or legal entity, you should draft and sign an amended operating agreement.
Top Reasons to form an LLC in Delaware
Delaware LLCs help you by protecting your individual assets from personal liability for your business debts. When your business is unable to pay, it is difficult the creditor to get your individual funds and properties.
In Delaware, a “charging order” is the only way for a creditor to claim assets of the LLC. The charging order does not allow them to control the business.
Remember that Delaware law will determine your company’s operations and extent of liability protection. Delaware’s LLC Act ensures that your personal accounts will not be taken by creditors. It is perhaps the strongest liability protection of any state. Delaware LLCs can be created without regards to your business’ actual place of operation. It has a flexible structure for owning and managing the business.
Furthermore, as a LLC is a contract-based structure, Delaware Courts will look at the operating agreement closely. Fiduciary responsibilities can be changed in the agreement. Changing fiduciary responsibilities permits the management to engage in good-faith risk no otherwise allowed. When fiduciary responsibilities are not modified, management still can do lots of business activities (except self-dealing) with no personal liability.
Delaware LLCs don’t have to file taxes with the state if they don’t operate in the state. Furthermore, the Secretary of State has long filing hours and sometimes approval can just take an hour. Delaware LLCs can engage in nearly any kind of business, such as property-holding, real estate, services, or holding assets such as cars and goods. Delaware’s Court of Chancery is a unique court with judges that are business-experts. This court is able to properly resolve many business disputes in a way many states can’t.
Overall, Delaware is considered a business-friendly state that gives both stability but also will adapt based on new circumstances, without however causing chaos to current companies. Also because of the number of cases that go through Delaware’s court system and Delaware’s very sophisticatedly-developed legal precedent on businesses, the result of disputes is very predictable.
If you need help with forming a limited liability company in Delaware or elsewhere, you can post your legal need to UpCounsel’s marketplace. Upcounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.