Key Takeaways

  • Determine the right LLC management structure—member-managed vs. manager-managed—for your business’s size and goals.
  • Draft and maintain a comprehensive operating agreement even if not legally required in your state.
  • Stay compliant with federal and state tax requirements and file timely reports to preserve good standing.
  • Keep business and personal finances completely separate to maintain liability protection.
  • Open a business bank account and obtain an EIN from the IRS to manage finances and payroll properly.
  • Understand your state’s publishing and licensing requirements for LLCs.
  • Use written contracts with all parties to reduce liability and clarify business terms.

Understanding how to operate an LLC isn't that difficult. In most cases, you will hire a team of managers to handle your company's day-to-day operations. If you want, members of your company can take on management responsibilities. The option you choose will usually depend on the size and complexity of your organization.

LLC Operation Steps

The most common reason to form a limited liability company (LLC) is to provide company members with the same limited liability protections enjoyed by corporate shareholders. With these protections in place, LLC creditors cannot pursue the personal assets of members. If you want to keep these protections in place, however, you must be sure that you're running your company as a separate entity from its owners. In particular, you should refrain from mingling LLC assets and member assets.

Appointing managers is the most effective method of operating your LLC. Your LLC can be member-managed, and in some states, you're allowed to hire an outside manager to run your company.

Drafting an operating agreement is another important step of operating your LLC. All members should consent to and sign the operating agreement, and this document should include the following information:

  • Capital contributions of members.
  • Member voting rights.
  • Method of profit distribution.
  • LLC management option.
  • How dissolution can occur.

In some states, you'll need to file this document with the state. By filing your operating agreement with the state, resolving future disputes will be much easier.

Financial Setup and Ongoing Compliance

Running an LLC successfully requires careful financial management and compliance with both state and federal requirements. Begin by opening a dedicated business bank account. This helps establish your LLC as a separate legal entity and ensures accurate recordkeeping. Avoid mixing personal and business finances, which can jeopardize your liability protections.

You’ll also need to apply for an Employer Identification Number (EIN) through the IRS. This number functions like a Social Security number for your business and is necessary for hiring employees, opening a bank account, and filing taxes.

Other key financial and compliance responsibilities include:

  • Registering for state and local taxes such as sales tax or franchise tax, depending on your jurisdiction.
  • Maintaining proper accounting records and considering hiring a bookkeeper or CPA to track income, expenses, and deductions.
  • Staying current on renewals and licenses, including business permits and any industry-specific credentials.
  • Keeping minutes and internal documents even if not required. These records can help if legal issues arise or the LLC structure is questioned.

Taxes and Annual Filings

After you've completed the basic steps of operating your LLC, you need to choose your company's tax classification and file the correct paperwork. The Internal Revenue Service (IRS) will automatically tax your LLC as a partnership if you have multiple members and as a sole proprietorship if there is only one member.

If you want, you may have your company taxed as a C corporation or as an S corporation, assuming your business meets the qualifications. Filing Form 8832 will result in C corp taxation, and filing Form 2553 means you'll enjoy S corp tax treatment.

LLCs that plan to hire employees that aren't members should institute a system for withholding taxes from their employees' paychecks. You should pay these withheld employment taxes directly to the IRS. Your employees will also need to receive a W-2 each year so that they can pay their taxes.

It's also important that your company file the correct tax return each year. If you are the owner of a single-member LLC, you need to attach a Schedule C Form to your personal return. Multi-member LLCs that have not elected corporate tax treatment will use Form 1065. The company should also provide all members with a Schedule K-1 Form. If you've elected C corp taxation, you'll use Form 1120. LLCs electing S corp taxation use Form 1120S.

Depending on the state where you formed your LLC, you may need to comply with periodic filing requirements. In California, for instance, you'll need to file a biennial report known as a Statement of Information. The first Statement of Information must be filed 90 days after creation of the LLC.

Fulfilling reporting requirements will maintain your company's good standing. If your state requires an annual or biennial report but you don't file one, you may be subject to penalties and could possibly lose your right to do business in your state.

Licensing, Permits, and Industry Regulations

Even after forming your LLC, you may need to secure additional licenses and permits depending on your industry and location. These may include:

  • Business licenses (state or municipal level)
  • Zoning or home occupation permits
  • Health or safety permits (especially for food service or childcare)
  • Professional licenses (e.g., legal, medical, accounting)

Verify requirements with your state’s business licensing agency or the Small Business Administration (SBA). Failing to comply can result in penalties or even closure of your business.

Choosing the Right State and Registered Agent

Where you form your LLC matters. Many entrepreneurs choose their home state, but others opt for business-friendly states like Delaware, Nevada, or Wyoming due to favorable tax laws and regulatory environments. Keep in mind, however, that if your LLC operates primarily in a different state, you’ll need to register as a foreign LLC and comply with local requirements.

A registered agent is a designated individual or service authorized to receive legal correspondence on behalf of your LLC. They must be available during business hours and maintain a physical address in the formation state. Using a professional registered agent service can help maintain privacy and ensure critical documents are received promptly.

Other Things to Consider

Filing the correct paperwork is a crucial component of operating an LLC. In addition, all of your company's paperwork should indicate its liability. This serves to let the public know that your business is an LLC and that members' assets are protected. You should also be certain that you're conducting your business in writing. Never do business without a written contract in place. In addition to using contracts with vendors and clients, you should have all of your workers sign an employee contract.

It's possible that you will need to comply with specific state requirements while operating your LLC. In certain states, for example, you must publish your company's formation documents. These states include:

  • Arizona.
  • Nebraska.
  • New York.
  • Pennsylvania.

Generally, you will need to publish these documents in a newspaper in the county where your company is located. Your LLC may be subject to suspension if you don't fulfill this publication requirement.

Maintaining Your LLC’s Legal Protection

After forming your LLC, it’s crucial to uphold the formalities that protect your limited liability status. Failing to do so can result in "piercing the corporate veil," where courts allow creditors to access personal assets.

To preserve your LLC’s liability shield:

  • Always identify the LLC clearly in contracts and communications by using its full legal name.
  • Maintain a clear boundary between member and business finances.
  • Document major business decisions and store important records securely.
  • Avoid using your personal name or assets to guarantee LLC obligations unless necessary and clearly stated.

Taking these steps demonstrates that your LLC operates as a separate entity and strengthens your legal protections.

Frequently Asked Questions

  1. What is the difference between member-managed and manager-managed LLCs?
    In a member-managed LLC, all members are involved in daily operations. A manager-managed LLC delegates decision-making to one or more appointed managers, who may or may not be members.
  2. Do I need a business license for my LLC?
    Yes, most LLCs need at least one business license or permit, depending on the industry and state. Check with your local or state agency for specific requirements.
  3. Can I be my own registered agent?
    Yes, but you must have a physical address in the state and be available during regular business hours. Many business owners prefer hiring a registered agent service for privacy and convenience.
  4. What happens if I don’t separate business and personal finances?
    Commingling funds can lead to personal liability if the business is sued. Keeping separate accounts and records is essential for protecting your assets.
  5. When should I consider hiring a lawyer for my LLC?
    You should consult a lawyer when drafting your operating agreement, dealing with multiple members, or navigating complex regulations. You can find experienced business attorneys on UpCounsel to assist with these matters.

If you need help with understanding how to run an LLC, you can post your legal need on 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.