How to Get an LLC: Everything You Need to Know
LLCs are a certain type of company that mixes liability protection, like a corporation, with the pass-through taxes that sole proprietorships and partnerships have.8 min read
How to Get an LLC
How to get an LLC is rather straightforward. You will need to select a name for your business, create incorporation documents, choose a person to be your registered agent, get needed licenses and permits, get an EIN from the IRS, and file properly with various local, state, and federal regulators. LLCs help with protecting personal assets and avoiding double-taxation.
What is an LLC?
LLCs are a certain type of company that mixes liability protection, like a corporation, with the pass-through taxes that sole proprietorships and partnerships have.
LLCs have many similarities to partnerships. LLCs are also similar to corporations due to the limit on personal liability. Furthermore, LLCs have less complex filing requirements than corporations. The requirements to form an LLC change depending on state. Many states make it so you don’t need yearly reports or formal guidelines. However you should still have those things in order to make sure your LLC is in good standing.
Also remember that in many states you will face, as an LLC, various taxes and fees that can add up in cost. In the LLC, a certain person will be chosen as the “responsible” person and have a significant amount of power over the LLC’s assets. For LLCs that have many owners, you need to select one person to be the contact when you get a Tax Identification Number for the LLC. This can be just one person.
Overall, LLCs are a common company entity, especially for new companies, and are created under each state’s different procedures. They protect their owners from liability and have pass-through taxation.
Advantages of Choosing LLC as Your Business Structure
A big benefit of using the LLC form is that you get pass-through taxes, meaning the earnings of the business are sent from the company to the owners’ personal taxes. This protects owners from double-taxation.
Besides protection from double-taxation and personal liability, LLCs also allow you to select among many different tax forms. You can be taxed, for example, as a S-corporation or sole proprietorship.
LLCs are beneficial for companies who are interested in personal protection from liability, however also don’t want to do complex filings. The LLC’s tax structure and benefits can lead to less tax liability due to the lack of double-taxation. The personal liability protection is also another big benefit, as owners don’t need to fulfill the company’s debts with their personal funds.
Steps to Form an LLC
When creating the LLC, you need to first decide upon your business name. It must comply with the state’s naming rules. You then need to send in your articles of organization along with a fee between $100 and $800, varying by state. Many states have more procedures. Look over the rules at each state’s Secretary of State’s website.
You should also make an operating agreement, determining the duties and powers of the LLC’s owners. Getting legal help during this processes is not mandatory, but advice from lawyers can help you craft the best strategy for your business. Some states will also then need you to send out a notice through the newspaper that you are creating a LLC.
Lastly, you must get certain licenses which many states need you to have in order to start a business.
Choose a Name for Your LLC
Each state has certain rules for how LLCs are named. You need to make sure you follow these rules. Check with the Secretary of State to find the regulations. The name cannot be the exact same as a company already registered.
LLC names must have a LLC variant at the end, such as “LLC” or “Ltd. Liability Company.” The name needs to be free of banned words (ex. Bank, Insurance, etc.), which vary by state. The state government’s LLC department can help you with finding if your hoped-for name is free. The name can be reserved for little while for a fee as you work on the incorporation articles.
Beyond the regulations for LLC names, ensure your desired name doesn’t infringe on trademarks. After getting a proper and free name, file your incorporation documents to register the name as well.
File Articles of Organization
After selecting a business name, you need to create your incorporation documents and send them to the state. Depending on state, these documents are called “articles of organization”, “certificate of formation” or organization certificate.
You also ought to create an operating agreement that details the rights, powers, and structure of how your business will function. Though not needed to comply with regulations usually, it is still very helpful. The incorporation documents are vital in certifying the way the LLC is structured, especially if later challenged.
A drawback of creating LLCs, compared to some other forms of organization, are the filing fees. While usually small, such as $100, in some states like California these fees can go up all the way to $800.
Overall the incorporation documents are easy and straightforward. Go to the state’s website and get a template form that you can quickly fill out. This form usually will just need you to write the business name, address, owner's listing, and who your registered agent is. Either all owners can sign or just one person can be given the responsibility to.
The registered agent is very important for the LLC. They will be the sender and receiver of legal correspondence, including court papers and legal notices, particularly for future lawsuits. Their name and address needs to put on the articles too.
Create an LLC Operating Agreement
Operating agreements are a key part of your business. Although not needed by law, they are very helpful. The operating agreement determines the methods and guidelines for how the business operates, as well as settles ownership questions. Usually the operating agreement has:
- Each owners’ percentage of ownership. Every owners’ duties and powers.
- The business structure and operating procedures.
- Procedures for transferring interests and contingencies when certain situations arise.
- Earnings distribution.
- Voting strength of owners.
- How meetings are to be held.
Publish a Notice to Form an LLC
There is one more step in a couple of states for creating your LLC. In these states, you need to publish a notification in a newspaper that you want to create a LLC. This notice needs to be repeated multiple times during about a month. After a month, you will then send in a publication affidavit to the state government. Many local newspapers in these states will assist you in this process and in sending in the affidavit.
Get the Required Business Licenses and Permits
You will also need to make sure you have the proper licenses before you start operating your business. While license requirements vary significantly, these may include a generic license to do business (tax-registering), getting a employer ID number from the federal government, and licenses for zoning, selling, etc.
Steps for Obtaining a Tax ID Number From the IRS
In order to get your EIN (Employer ID Number), you need to contact the IRS. You can do it rather easily online and don’t need to use mail or fax.
When you apply, the IRS will ask you to provide the owners’ social security numbers, why you want an EIN, various projections regarding salaries, etc. When you apply, it is a good idea to already know many of your business’ details and plans. An important thing to note is that despite the number of owners in the LLC, only a single person is responsible for the tax ID application. You might need to talk with the other owners to decide who will be the responsible person. The responsible person’s details will be provided as part of applying.
It is quite easy to get the EIN online from the IRS. Go to their website and find the “Online EIN Application”. It usually takes less than 30-minutes to process and is usable during the hours of 7 am PST all the way to 10 pm. For applying for an EIN beyond those hours, there are other possible methods you can also use anytime of the day.
You can also send in an EIN application by postal mail. However this normally takes between 4 to 5 weeks to process, varying based on the IRS’s workflow demands. You may end up waiting all that time just to get an error notification and have to reapply. When your EIN gets denied or gets an error, you often will not be provided a specific reason. Therefore you will have to begin the EIN process all over again.
You can also send in your EIN application by fax to the IRS. The IRS normally takes just 4-days for processing these documents. However sending your application in this way still is risky because the IRS does not send back a notice that confirms your fax was delivered and is being processed.
After the EIN is approved by the IRS, you will get an email that has your EIN number. Then you ought to be on the watch for a mail package from the IRS that has further tax paperwork.
Mistakes to Avoid When Setting Up Your LLC
If you choose an incorrect legal structure for your company, you may end up getting double-taxed. For example, if you are a sole proprietor and decide to become a C-corporation then you will owe taxes for both the company and for yourself on the same income stream.
Choosing the wrong structure also might limit your ownership freedom. If you become an S-corporation rather than a LLC, for example, the owners will need to split the earnings equally rather than another other possible distribution methods they might have wanted to do.
States like Delaware and Nevada are especially business-friendly. They have clearly developed company law, no taxes on individual, business, and franchise earnings, and low fees for filing. However it is a hassle to incorporate in multiple states and therefore it only is helpful usually to big businesses.
For businesses that have four or fewer owners, it is better to instead form the business where the company is physically active and based. If you want to incorporate in another state, you will face many difficulties not worth it for a small company. These difficulties include trouble creating financial accounts, getting a registered agent, and various foreign LLC fees.
You will also face problems if you start your business without getting certain needed permits.
Overall you need to make sure that the LLC is complying with all the various laws and regulations on the local, state, and federal levels. You want to do this to avoid legal enforcement actions from the government or being sued by other people.
Here are some requirements that will help you keep your LLC in good standing:
- Your company and personal assets and money need to be kept distinct.
- When you sign legal paperwork, make sure you are using your business title.
- If you are using a different name from your legal business name, register a “DBA” (doing business as) name.
- File your yearly reports on time.
- If you are active in other states besides your incorporated states, register as a foreign LLC.
- If your business changes its documents, send in an amendment article to the state.
Remember that your personal liability protection from having a LLC doesn’t apply if you are engaging in fraud or actions that break the law. Such actions will still result in personal liability.
Remember that your business is not too small to become a corporation or LLC. If you just stay as a sole proprietorship, you lack the personal liability protection of LLCs.
If you need help with creating an LLC, 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, Stripe, and Twilio.