How to Make an LLC: Everything You Need to Know
How to make an LLC began in Wyoming in 1977, but by 1990s most states had created the process to make a startup structure for businesses. 7 min read
How to Make an LLC: Everything You Need to Know
To learn how to make an LLC, it is important to first understand what LLC means. LLC stands for “limited liability company”, and began in Wyoming in 1977. By 1990s, however, most states had created the process to make a startup structure for businesses.
It remains similar to a partnership, but it lacks the formalities, documentation and additional fees of that structure. It offers legal protections of any personal assets of the owner like corporations do. It then creates a simplified flow through tax treatment with the owner held responsible for the money except if a voluntary contrary election has become offered.
A contrary election is defined as a participant in a plan electing to defer or not defer a portion of any compensation. Deferment could refer to money for taxes or for a retirement plan, and is usually an arrangement between employer and employee. It makes an LLC a good option for starting a new company without being tied to regulations before employees see any real profit being made. Resources can therefore be devoted to growing a business first.
What Comes Next
Forming an LLC has an easy to follow process driven by state law. A legal document will include all questions pertaining to the framework of the business operation.
Forming an LLC begins with picking the state where it will reside. Most people choose to form the LLC in the state of operation. Choosing another state to form the LLC is possible, but will incur fees and other rules that have to be met.
After learning LLC rules, some choose to create a business in Delaware because it has become known for its well-developed business law.
If setting up business in a home state, other processes exist.
Choosing the Name
The next step would be to name the LLC. The name must comply with state rules and must be available, meaning that there is no other business with the same name. The following are things to consider when naming an LLC.
- Certain words are prohibited for use within the name, such as “city”, “corporation”, “incorporated”, “bank”, or “insurance”. These labels have a business law meaning attached to it, with accompanying rules, penalties, or fees.
- Conduct research on the internet to see if the name has been used by others, and check for trademarks.
- Note that if the LLC cannot be formalized right away, a person can pay a fee to hold the name until the business is official.
- Some names may trend or be popular depending on new trends and technology, so protecting such names early on can give a person options.
- After making a list of possible names, consider if any of the names have limits. Will the name work if the business grows into a corporation?
- Also check if the domain .com is available on the internet, since it has become such an integral part of doing business.
If a business owner wishes to use a name other than the formal LLC one publicly, the business owner must file a “fictitious business name” statement or the DBA “doing business statement “documents. Otherwise, it can be deemed possible criminal activity.
Business name domains can be bought and sold, so if there is a name that you are after, make an offer. Also, consider how the name will work as a logo when art and design work is incorporated. Names of businesses when successful can become a trademark.
Now that the name has been claimed and cleared, file the formal papers. Termed “articles of organization” this basic document has a filing fee and sets the business into legal form. Some states name it “certificate of formation” or “certificate of organization.”
Filing fees in most states remain reasonable and are listed at around $100. Some states include an annual tax such as California’s franchise tax, and this is set at $800. Check with the state if it has required annual reporting fees. If the LLC has more than one owner, list those names as members on the form. Two ways exist to handle such.
All the LLC owners can prepare and sign the articles of organization, or they may pick one person to represent them and have them sign it. The title “registered agent” or an “agent for service of process” notifies all who receive the legal papers for the group. Expect to receive the articles of organization in about 10 to 20 days.
After filing legal papers, begin to explore the LLC as a business. Some states such as New York. require the business to provide a publication that it exists. Posting in the local newspaper several times fulfills the requirement and involves a simple statement of the intention to form an LLC. After publication, submit an affidavit of the publication to a filing office. Now find the time to create the list of rights and responsibilities the company will operate with. State law does not require it but if more than one person is listed as owner, clarity will become needed on how to operate.
An operating agreement defines processes and terms. It gives a basis for a business operation. Operating agreements have more than rights and responsibilities. It includes members’ percentage of interest in the business, voting power, methods of management of the LLC, allocating profits and loss, rules for the meetings, and how votes become handled. Other provisions determine the process for buying and selling shares in the business if it has more than one member. It covers the process of entering a new member or exiting a member who dies or becomes disabled. This makes business meetings more effective since these central core issues have been decided and recorded leaving more time to concentrate on growing the business.
As the business grows, additional key issues will need defining in the LLC operating agreement. Once managers become chosen, indemnification protection will become needed.
- How will capital contributions made by parties become handled and recorded?
- What penalties will happen if said contributions have not been made?
- Who analyzes the ways money becomes raised by investors?
- Who raise the money was it angel investors, investors, venture capital firms, or family members?
Exploration of federal and state security laws must occur since issuing LLC units to investor will have to comply to those statues. A private placement exemption takes legal advice to implement appropriately, hire a good lawyer for advice. Once accomplishing that begin to discuss procedures for communicating to investors. Despite organization, nothing becomes guaranteed it will be a success. To prepare for the possibility of business failure investors need to fully understand the risks of investing in an LLC. Representations and warranties must be defined as accredited. A separate section in the articles of organization must happen with investors.
The Rights of Investors
Along with the articles of organization, it may become a good procedure to supplement with an investor rights agreement separately. This clarifies terms and conditions on both parties’ part. Investors rights are listed as:
- Tax benefits
- Voting rights
- Rights to portion of the profits
- Pre-emptive for future unit issuances
Clearly defining what is and what is not saves time and money in the long term. It allows an investor to fully understand what portion of the business they have a say in.
Transacting money, paying taxes, and notifying people of the business though not the primary organization needs tending to in order to run a smooth operation. If the LLC has any employees, the IRS requires an EIN number known as the employer identification number. EIN also has been referred to as a Federal Tax Identification Number.
In most cases, these can be obtained via a trip online to the IRS website, where a person can file for a number. This service does not incur any fees, and a business person gets the EIN immediately. After obtaining it, visit the bank and open a business account-- most banks require a business account to have an EIN, and will want to see the filed articles of organization, the resolutions of the LLC authorization, and a designated signing authority. Make sure you decide whether the business will use one or two signatures.
Now that the business has officially been set up with a bank account, take into consideration the following:
- How the bank handles large amounts of money
- Making sure other members are aware of large changes in money coming in and out of the bank.
- Checking with the state and the county whether any other licenses or permits are needed. Depending on the business, a seller’s permit and or a zoning permit may be needed.
Now that the organization has been set up it’s time to set up a ledger. Day to day business activities need recording. These should include the transactions made by the individuals in the business. The following is a list of items that a business may want to include in the ledger.
- A list of names and address of LLC owners and each of his or her transactions.
- An account of how much is held by each member.
- The dates of when these were required and who release them.
- Transfers between units and members/parties.
- Sections to account for doing business with other states. Record any state/local filings.
Many states require an annual report filed, so tracking transactions during the year is simplified, making it ready for state documents. When making accounts for different states, make sure to take note of each state’s requirements.
List any amends to the information with an explanation. States have deadlines on turn in for such reports. In some states failure to do so can let the state dissolve the business or at least suspend it. In most cases, late fees and penalties are assessed so the business continues.
An LLC serves a business owner well by keeping separate their business assets from their personal assets, which is an important distinction to make when business endeavors thrive or tank. Keeping a ledger ensures that you have an accurate record of the organization’s business practices. Done incorrectly, a business will have difficulty if they ever find themselves in the need of taking care of debt and distributing the remainder between members.
Each state has slightly different rules so as a business expands the LLC should adapt to each state’s statutes. The structure gives much opportunity to create small business groups that address local needs first and create a microeconomy. This structure has worked well to allow startups to create jobs. Some have grown into major corporations since the first LLCs began.
For most business owners, it lets them create a company within a state easily with limited liability. The structure has served to provide small to medium business companies offering products to niche markets within corporation markets. The articles of organization guide business owners to create structures that avert legalities common among business and concentrate on the business of making money.
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