How to Start an LLC: Everything You Need to Know
Figure out how to start an LLC by first gathering relevant information. An LLC means a limited liability company. 8 min read
How to Start an LLC
Figure out how to start an LLC by first gathering relevant information. An LLC means a limited liability company. This particular business structure protects your personal assets while highly defining the structure of the business.
Many small businesses in the global economy have begun to look at LLC as a means to incorporate. Having less fees, documentation, and formalities, it streamlines the process and covers the essentials needed to have a protected business. Be aware the statutes for LLC vary state by state. It takes thorough research on your part to accomplish the goals of setting a business structure that will work in today's business environment.
Advantages of LLC
The LLC business structure works for small business but leaves room for major expansion into a medium sized business. A choice of one owner or an owner with members invested in the business gives a wide array of options while developing. Key features of this structure include:
- Separates personal assets from business assets
- Pass through taxation where profit or losses pass to individuals who report on their tax forms
- Owners not responsible for liabilities or debts of a company
It does this within a framework defined by articles of organization that you and your members choose. LLC protects you the owner from other practices. It notifies others the level of protection your company has. Also, consider how much initially the business will make and the type of industry the business will be in. Some industries receive more litigation than others. What an LLC does is prevents creditors from bringing lawsuits against an owner. The creditors sue the business instead. Determine the level of money borrowed or credit lines for the business. If planning on keeping business and personal assets separate, the LLC becomes the business vehicle for you.
Naming Your LLC
It takes research to find a good name for your business. The naming has rules you must adhere by in the state you set your business up. The business name cannot have profanities or explicit sexual language. You cannot duplicate the name of another business exactly. Ways exist to make a similar name, but that may or may not be a good choice especially if a business with a similar name goes bad.
Depending on the state other restrictions may exist. Consider what words represent your business interests. Make a list and then begin researching on the internet if others have used that name in your state. What a business owner wants remains something distinct and memorable. It should set your business apart from competitors. Check to see if the name occurs in trademarks. Those type of brand names are not available for use.
To identify the company, you have become the state will require the acronyms LLC, L.L.C or the term limited liability company after your name. It becomes extremely important that as a business person you form the habit of adding LLC to your advertisements, marketing material or business transactions.
If you plan to expand to other states, you may want to check that as well. Most recommend checking the secretary of state’s database of registered names to ensure your business is unique. Some states have an online database that for a small fee allows a search. It will take some time to organize the business adventure than many states let a you reserve a business name.
You pay a fee, and the state hold the name for a short time before registration. Registration procedures vary state to state. Some states have the name registered separately from the articles of organization used to run the business. Other states insist that your business name not be registered until the articles of organization become filed. If you have a sole proprietorship that has been wildly successful, you can convert it to the LLC structure and retain the established name of your business.
Find out the state mandates and follow it. If the name of your business has a level of creativity also consider registering it as a trademark to make your product or service different from competitors. You must trademark to receive trademark infringement protection. An U.S. Patent and Trademark office has the responsibility for that. It takes a form filled out and a fee of $275 to $325.
Setting Up Your LLC
Several options exist for setting up an LLC. You can run the company, or you can appoint someone to run the company. You can have a board with members as co-owners of the company.
In fact, the most common form of LLC has been a set of owners running a business. LLCs are a small business form that allows more structure as a small business progress without the need of a separate management. Decision making remains direct. Most states prefer this type of structure and make member managed LLC the default structure if you do not designate the structure. It remains possible to have a member managed LLC with only one member. In some states, the article of organization does not have to become filed. The other structure termed manager-manager LLC has a designated member be responsible for operation or even an outsider to the inner organization running operations.
The manager-managed LLC works well when some members wish to be passive investors. If some people prefer not to manage but want to be part of the board the manager-managed makes it possible. If ownership becomes diverse or large, it allows some members to participate but not manage.
How to run the business comes from a consensus of you and your members. A form known as the “articles of organization” must be set up and filed with the secretary of state where your business will operate.
Other terms to describe the structuring of the business include certificate of formation and certificate of organization. It requires stating your LLC business name, providing a legal address, stating and the purpose of your business. At some point in the document, you must list the member names and what operation structure you have agreed to run the business by.
When you file the articles of organization, a fee amount will become required with the amount ranging $100 to $300. At this point, you will have to provide a name for who will receive legal documents for the LLC known as the registered agent. It must be a person or another entity foreign or domestic since the company by law cannot act as the registered agent.
Other requirements exist in each state and even at county level. Check and see if additional license requirements apply to the business.
Contacting the county clerk or the Chamber of Commerce can reveal additional conditions for doing business in your local area particularly if your business has a physical location. Zoning licenses may apply as well as specific permits for your location. Check for websites that allow registration online and accompanying fees. Apply for an employee identification number known as a EIN. It can be used in lieu of a Social Security number for vendors or other opportunities.
Again, it keeps the business separate from personal information. The EIN becomes used on the tax forms of the IRS. It helps LLCs track employee tax withholdings. The IRS only requires the EIN if you have employees in your business. Be aware if you hire independent contractors the EIN is not required. The independent contractors have the responsibility of paying for their own taxes. The IRS does not consider independent contractors employees. If you and the members decide to hire employees the following information to receive an EIN becomes needed:
- Name of LLC
- Name of the owner
- Owner’s Social Security number or Social Security number of the managing member Business address
- Country of incorporation
- Number of members in the LLC
- Information on the product or services of your business
The IRS provides the service at no fee.
Setting Up the Bank Account
Consult different banks about business accounts options that will work with your service. Be sure to inquire on how a bank handles different situations with money that may come up while doing business. Ask the bank how the they handle large withdrawals or even large deposits of money. See what the expected time for usage on a deposit typically runs and how long before a large withdrawal becomes available. Explore the options on short-term loans to ensure if a large order comes in enough capital exists to accomplish the goal. All those items affect reputation and business management.
Essentially you are in an alliance with a bank that provides a service for part of your business. It becomes especially important if employees become hired and payrolls must be made. Ask the bank about the specific documents needed to open a business account. Some states require before transacting money that a notice in the local paper be published that you intend to form a LLC. Then an affidavit of publication becomes filed with the LLC filing office. Now take your EIN, article of organization and other pertinent information to the bank and create the business account.
Writing an LLC Operating Agreement
Some states require registration of an operating agreement. If more than one member exists in your business, then an operating agreement remains necessary. If a solo LLC then consider doing it as added protection against a lawsuit.
Disagreements arbitrated by the late fall on default rules of that state if an operating agreement is not done. It may or may not be favorable to your case. Judges prefer operating agreements When making an operating agreement stay within the structure of the LLC. Blending structures open other possibilities for courts to make decisions.
You and your group must define management and financial structure. Define how the LLC shall be run and who runs it. Determine who will share in the profits and how that shall become distributed. Line out a process for dealing with disagreements. Know that having an operating agreement overrides the state default rules. In case of a problem, an operating agreement assures you are evaluating by your own rules, not the states. Like your business name operating agreements remain a unique aspect. It remains another personal mark that the business truly is yours. The following are components of most operating agreements:
- Members and who is the owner
- What portion of the LLC each member owns
- Rights and responsibilities of each member
- Requirements of contribution of each member
- Benefits members will receive
- How the LLC votes and voting structure
- How the LLC votes become collected and counted
- How profits become allocated
- How losses become allocated
- Management of LLC
- Meetings defined, what rules meetings will be held by, and when the meetings are
- Rules for a member buy out
- Rules for selling
- Rules for provisions
- Protocol when a member dies or has a disability
LLC’s leave room for expansion so put some benchmarks when the structure needs to become tweaked or consider the possibility of forming a corporation. Understand once the structure becomes put in place it will change over time according to business needs. LLC structure sets a foundation to create the many areas that make a successful business work smoothly and efficiently. As business relationships develop and employees become hired new legal situations will arise. The LLC has flexibility built in to accommodate those types of changes.
The LLC makes you consider in detail your business operation and the parameters it will work under. It delineates responsibilities and leaves room for any growth opportunities. It protects personal assets while holding members accountable for business income or debts. It lays the ground work to form a payroll division in a company but allows hiring independent contractors for projects. It notifies the public what level the business ranks while at the same time announcing the protections the business remains under.
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