Key Takeaways

  • Creating an LLC involves choosing a business name, filing formation documents, and appointing a registered agent.
  • Operating agreements are essential for outlining financial and managerial roles, even if not required by law.
  • Keeping business and personal finances separate is critical for maintaining liability protection.
  • An EIN is necessary for hiring employees, opening business bank accounts, and federal tax compliance.
  • Annual reports and other required filings help keep the LLC in good standing.
  • Insurance can provide additional protection beyond what LLC liability laws offer.
  • Some states have publication requirements and special rules for foreign LLCs.

How to Manage an LLC

To manage an LLC, you must create the LLC, establish a payment allocation system, create an operating agreement and protect your assets using insurance if necessary. LLCs offer the limited personal protections of corporations but without the burdensome requirements of a corporate structure. Further, LLCs are easy to create and are less costly. It is a great option for people who do not intend to raise a large amount of cash.

Allocation System

LLCs permit special allocation of profits, which is the proportionate share of member profits based on the amount of ownership, otherwise known as guaranteed payments. This also allows members to write themselves checks whenever they need money, but only if the LLC has cash readily available. Further, members can record profits on their tax returns while writing off any losses in the process.

Further, a managing member’s share of any bottom-line profit is not classified as earned income due to the managing member being considered an inactive owner, giving them access to tax-fringe benefits. A guaranteed payment system is also earned income to each member, allowing them to enjoy tax-favored fringe benefits.  

Creating an LLC

The articles of organization creates your LLC and must be registered with the LLC corporate division of your respective state. The corporations division is usually associated with the secretary of state office in your state. Fees vary, but they usually amount to around $100.

States usually give you a one-page blank form, where you supply essential details about your LLC. Details should include:

  • Name
  • Address
  • Contact Info
  • Registered Agent

Other states may require you to list all names and addresses of each LLC member.

Choosing a Business Name and Registered Agent

Before filing your LLC, you’ll need to select a unique business name that complies with your state’s naming requirements. Most states require the name to include “LLC,” “L.L.C.,” or another variation to indicate limited liability company status. Be sure to check for name availability through your state’s business database.

You’ll also need to appoint a registered agent—an individual or company authorized to receive legal documents on behalf of your LLC. The registered agent must have a physical address in the state where the LLC is registered and be available during regular business hours.

Foreign Qualification for Out-of-State Business

If you plan to conduct business in a state other than where your LLC was formed, you must register as a “foreign LLC” in that state. This process, called foreign qualification, involves filing paperwork and paying fees in the additional state. You’ll also need a registered agent located in each state where you operate. This is crucial for legal compliance and avoiding penalties.

Operating Agreement

An operating agreement outlines the basic management structure of your business. It is not a document you need to register with authorities, but you should draft one for the sake of organization, and to ensure that all members know their roles and duties. Further, you should detail the compensation plan in the operating agreement so all parties are aware of how they will be compensated, including their share in the business.

Member vs. Manager Management Structures

LLCs can be structured as either member-managed or manager-managed:

  • Member-managed LLC: All owners (members) are actively involved in running the business.
  • Manager-managed LLC: Designated managers (who may or may not be members) handle daily operations, while other members take a passive role.

Your operating agreement should clearly define which structure your LLC follows and detail the roles and responsibilities of each person involved. Choosing the right structure impacts how decisions are made and how the business is perceived by investors and partners.

EIN

EINs are used by the IRS to label and tax your business. Getting a federal employer identification number is crucial for a number of reasons, including:

  • Hiring Employees
  • If Your LLC has more than one member

You may get an EIN for free by visiting the IRS website. An EIN is also crucial when you open a business bank account.

Tax Classification Options

By default, the IRS classifies single-member LLCs as disregarded entities (taxed like sole proprietorships) and multi-member LLCs as partnerships. However, LLCs can elect to be taxed as an S Corporation or C Corporation by filing Form 8832 or Form 2553. This flexibility can provide tax advantages depending on the nature and size of your business.

Consulting a tax professional can help you determine the most beneficial tax structure for your LLC, especially if your goal is to reduce self-employment taxes or reinvest profits back into the business.

Dividing Business and Personal Assets

Even though certain states frown upon this practice, some individuals create sole-member LLCs to obtain a new EIN and get a new line of credit. Regardless, you should avoid mixing business and personal lines of credit. With that, if a member secures collateral or funding based on his or her personal credit score, consult an account to document the transaction accordingly.

Regardless of how the credit is obtained, you should always maintain a firm wall between personal and business matters. Failure to do so may open up your LLC to legal risk despite LLC personal liability protections. Some courts and creditors have been able to get around LLC liability laws if members comingle personal and business activities.

Insurance

In the event that LLC laws do not protect your assets, you may also get a sound insurance policy that protects your assets. For example, if you’re a massage therapist who injures a client, your insurance policy will protect your assets in case a lawsuit occurs. Moreover, insurance is a great asset should a court ignore your liability protections. Insurance can also protect business and corporate assets from judgments and lawsuits.

With that, it is worth noting that commercial insurance does not safeguard corporate or personal assets stemming from unpaid business debts, regardless of whether they’re guaranteed personally.

Paperwork

Annual filing and other regular paperwork is a necessary part of maintaining an LLC. For example, an LLC based in Michigan must renew annually, and the LLC could risk being dissolved if you fail to file on time. For this reason, you must be sure that your articles of organization remains in good standing, and be sure to include any changes to the LLC by mailing in updates to the IRS and your state. When signing any documents for the company, use the full company with the applicable suffix (LLC, L.L.C, etc.) and include your name as the member of the LLC with your official title.

State-Specific Requirements

Each state has its own rules regarding ongoing LLC compliance. Some states, like New York and Arizona, require LLCs to publish a notice of formation in local newspapers for a designated period. Others may mandate franchise taxes or biennial reports instead of annual ones.

Failing to meet state-specific requirements can result in late fees, penalties, or administrative dissolution of your LLC. Always check with your Secretary of State’s office or consult a legal professional to stay on top of your obligations.

Maintaining Good Standing

Staying in good standing with your state involves more than filing annual reports. It also includes:

  • Paying required fees or franchise taxes
  • Maintaining an active registered agent
  • Updating your business address or member information as needed
  • Keeping accurate business records and minutes (if applicable)

A lapse in compliance can limit your ability to enter into contracts, access financing, or defend your LLC in court. Make use of compliance calendars or legal services to help manage these obligations effectively.

Recordkeeping and Internal Controls

Implementing strong internal controls and recordkeeping practices helps ensure transparency and financial integrity. Consider:

  • Keeping separate bank accounts and credit cards for business use
  • Documenting all major business decisions in meeting notes
  • Using accounting software to track expenses and income
  • Storing documents like the operating agreement, EIN confirmation, formation documents, and licenses in a secure location

Good recordkeeping is especially important during audits or legal disputes and reinforces your LLC’s limited liability protections.

Frequently Asked Questions

Do I need a lawyer to form and run an LLC? No, but having a lawyer review your operating agreement and formation documents can help avoid costly mistakes.

Can a single person run an LLC? Yes, a single-member LLC is common and offers the same liability protection as a multi-member LLC.

What taxes does an LLC have to pay? LLCs may owe self-employment taxes, income taxes (pass-through or corporate, depending on election), and state-specific fees like franchise taxes.

How do I pay myself as an LLC owner? You can take owner draws or guaranteed payments, and if taxed as an S Corp, you may also pay yourself a salary.

What happens if I don’t keep business and personal finances separate? Mixing funds can lead to “piercing the corporate veil,” where courts may hold you personally liable for business debts.

Want to learn more on how to manage an LLC? You can find out more by, submitting your legal inquiry to our UpCounsel marketplace. UpCounsel’s attorneys will help you through the management process and will find you the best ways to protect your personal and business assets. We will also help you plan for emergency situations, such as lawsuits, and they will guide you through the rough patches so you can focus more on your business operations.