LLC Establishment: Everything You Need to Know
LLC establishment is the process of forming a limited liability company, which is one of the most popular business forms for small businesses.3 min read updated on January 01, 2024
Establishing an LLC Overview
LLC establishment is the process of forming a limited liability company, which is one of the most popular business forms for small businesses. The specific rules for LLC establishment differ by state, but in all states, you must file Articles of Organization with the Secretary of State and pay a filing fee. This fee can run from $40 to $300. You should consult with the website of your Secretary of State to find out what the specific requirements for your state are.
Some LLC establishment practices that are generally not required but are often recommended include:
- Drafting an operating agreement. This sets out the specifics of your business arrangement, such as the rights, responsibilities, and ownership percentage of the business members.
- Hiring a lawyer. It may be good to have legal assistance when drawing up an operating agreement to make sure everything is in the proper order and that your interests have been properly protected.
- Keeping proper records. Filing annual paperwork and documenting meetings and major business decisions can help protect your status as an LLC and help you if legal issues arise in the future.
Some states may charge taxes and annual fees for LLCs that can diminish an LLC's economic advantage, but others may find that the limited liability protections, pass-through taxation, and lesser administrative requirements make up for this. You should weigh the pros and cons of the LLC carefully before moving ahead with LLC establishment, just as you should consider the process of establishment before you move ahead with it, as well.
Choosing a Name
The first step you must take in establishing an LLC is choosing a name for it. This name must adhere to your state’s LLC naming rules, which may vary in some respects from state to state but must meet the following stipulations in any state:
- It must be unique. Your LLC name cannot be the same as another LLC’s name. Your state’s LLC name search will inform you as to your name’s uniqueness.
- It must include an LLC designator. These include such phrases as “Limited Liability Company” or “Limited Company” or abbreviations of them (“L.L.C.,” “LLC,” Ltd.,” etcetera).
- It must not use prohibited words or terms. Such words and terms may include “Corporation,” “Secret Service,” and “Bank,” but there may be some variance from state to state.
Articles of Organization
Once you have selected your LLC’s name, you will then need to file your Articles of Organization (also called a Certificate of Formation or Certificate of Organization in some states) with the Secretary of State. Articles of Organization are usually simple documents that can be filled out in a few minutes and which provide such basic information as your LLC’s address, name, and LLC member names. They usually come as a form that can be filled out, and this form (sample) can found at your Secretary of State’s website or local office. Generally, the filing fee for this will be around $100, but LLCs filing in California will be charged an $800 annual fee in addition to this.
Appointing a Registered Agent
Most states require LLCs to appoint a registered agent, who is a person or entity designated to accept and issue legal papers on behalf of your LLC. Requirements for such a person or entity may vary from state to state, but all registered agents must be a resident and have a physical address within the state of the LLC that they represent.
Drafting an Operating Agreement
Drafting an operating agreement is not often required by law, but it is highly recommended, nonetheless. A standard operating agreement will address such issues as:
- The percentage of interest each member will have in the business.
- The responsibilities and rights each member will have.
- The voting power each member will have.
- The allocation of losses and profits.
- The rules for taking votes and holding meetings.
- The buy-sell provisions, which address how to handle a member’s interest if they want to sell it, if they are disabled, or if they pass away.
Having an operating agreement is important because it establishes up front the procedure for a variety of potential future scenarios, thereby avoiding unnecessary confusion or disputes later.
These are just some of the more important issues you will have to consider when establishing your LLC. If you need further help understanding the process of LLC establishment, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.