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. 8 min read
How to Make an LLC
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. LLC means limited liability company.
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 monies except if a voluntary contrary election has become offered.
A contrary election defines as a participant in a plan electing to defer or not to defer a portion of any compensation. Deferment could mean money for taxes or a retirement plan. It ends up as an arrangement between employer and employee. An LLC makes it voluntary therefore each participant may be responsible for paying taxes or saving for retirement rather than an owner of a business. It makes LLC a good option for starting a company without being strapped with regulations for employees before real profit becomes made. Resources can become devoted to growing a business first.
What Comes Next
The large formal words such as liability, deferment, etc. can make people reluctant to form small businesses. Forming an LLC has an easy to follow process driven by state law with questions being answered on a legal document that form the framework of the business operation. It begins with picking the state where it will reside. Most people opt for the first time to form the LLC in the state where it will operate. Choosing another state remains possible but adds fees and other rulings that should become complied with. Once learning LLC rules, some opt to create a business in Delaware since it has become known for its well-developed business law. After setting up a business in a home state, other processes exist to add other states to the LLC business as it expands.
Choosing the Name
The next step lists as naming the LLC. The name must comply with state rules and must be available. Available means some other business does not have that name. It must be unique. The state will have a LLC office, but often one of the county offices will register the business. The LLC designator will attach to the end of the name of the company. Variations exist such as limited liability company, limited company, or one of the abbreviations LLC, L.L.C., Ltd., or Liability Co.
When naming certain words have been prohibited for use within the name such as city, corporation, incorporated, bank or insurance. Those labels have a business law meaning attached to it with accompanying rules, penalties or fees.
Do research on the internet to see if the name has been used by others and check trademarks. If the LLC cannot become set up right away, a person can pay a fee to hold the name until such time the business can formalize. Some names have a popularity during certain decades especially with new trends and technology so protecting the name early on gives 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? Internet has become an integral part of doing business so check domain names and if the .com has availability. 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 become viewed as possible criminal activity. If someone owns the possible name of the business, do not give up.
Business name domains can become bought and sold. Make an offer. Also, consider how the name will work as a logo when art and design works upon it. 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 state remain reasonable and list as around $100. Some states include an annual tax such as California’s franchise tax 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 a “agent for service of process” notifies all who receive the legal papers for the group. Expect to receive the articles of organization in most states that require it about 10 to 20 days.
After filing legal papers begin to explore making a business state as to the LLC’s intent and purpose. Make decisions on who will manage the LLC, and it can be more than one manager. It can also become designated as a limited liability company members can manage.
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 a 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 lists 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 list 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 run a smooth operation. If the LLC has any employees, the IRS requires an EIN known as employer identification number. EIN also has been referred to as a Federal Tax Identification Number.
In most cases, a trip online to the IRS website a person can file for a number. The service for this has no 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. Most banks will want to see the filed articles of organization, the resolutions of the LLC authorization and a designated signing authority. Make sure the members have decided if the business will use one or two signatures.
Also, tell the bank how to handle large money amounts sent to the bank or withdrawn. A business owner with other members needs to be immediately aware of large changes in money coming in or going out. Check with the state and county now that the business has officially been set up and has a bank account if any other license or permits are needed. Depending on the business a sellers 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. A listing of the names and addresses of LLC owners or members needs recording. An account of what class of units are held by each member and the number of units needs a running account. It needs dates of when those units were acquired and when who released them when. It needs to list any transfer of units between members or parties with the dates of transfer. Many states require an annual report filed so tracking it during the year keeps it ready for the state documents. Create sections to account for doing business with other states. Each state has different requirements so record any state or local filings made to do business in that area. 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. An important distinction when business endeavors thrive or tank. Success has its own problems such as keeping the ledger and organization a true reflection of business practices. If not done correctly or at least with the intent to do correctly can cause just as much grief as a failed business. A business needing dissolved must take care of debt and distribute what’s left among the members.
Each state has slightly different rules so as a business expands the LLC should adapt to each states statute. The structure gives much opportunity to create small business groups that address local needs first and create a microeconomy. The 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.
If you need help with creating a LLC, you can post your legal need on UpCounsel’s marketplace. UpCounsel hires only the top 5 percent of lawyers into its site. Most have 14 years of legal service and have worked with small business to corporate. Their level of expertise ensures you the best and latest legal advice.