Setting Up an LLC: Everything You Need to Know
LLCs exist as entities separate from their owners, thus protecting the owners from personal responsibility for business debts. 4 min read
2. Bonus Tips and Advice
3. Best State to Incorporate
4. Business-Friendly States
Setting up an LLC is a straightforward process that follows general guidelines but differs slightly among the states. Many new business owners structure their businesses as limited liability companies (LLCs) because of the ease of set up, flexibility, and fewer regulations. LLCs exist as entities separate from their owners, thus protecting the owners from personal responsibility for business debts. A tax “flow through” feature of LLC helps to avoid double taxation typical for corporations.
Steps to Form an LLC
1. Name your company according to your state's requirements.
- The name must end with the words “Limited Liability Company” or abbreviation “LLC.”
- The name must be distinct from other registered business names. Search online for a name availability. Search U.S. Patent and Trademark Office website to avoid trademark rights issues.
- The name can't contain prohibited words, like “bank,” “insurance,” or “trustee,” and words like “corporation,” “Inc.,” or “corp.”
If you found a name for your LLC but not ready to file your documents, reserve the name by filing a name reservation request along with the fee.
2. File articles of organization, also known as a certificate of formation or certificate of organization, with the secretary of state. On this simple document, list the name and address of your business and, if applicable, the names of all the owners. Filing fees are usually about $100. States like California also require an annual tax of $800 or more. If necessary, indicate whether the company will have one manager, more than one manager, or if all members will be managers.
3. Appoint a registered agent responsible for all legal correspondence for your company. Usually, you can choose any state resident over 18 to be your registered agent.
4. Though usually not required by the state, creating an operating agreement, even before filing your articles of organization, is a good practice. The operating agreement helps to prevent disagreements by clearly defining the owners' rights and responsibilities. The operating agreement typically covers the following areas:
- The amounts and deadlines of the owners' capital contributions and penalties in case of failure
- Profits and losses distribution
- Distribution or liquidation preferences for parties or classes of securities
- Management structure of the LLC
- Number of officers
- Voting rights for major events
- Indemnification protection for the managers
- LLC interests transfer restrictions
- Members meetings regulations
- Dissolution procedures
Your lawyer or an online filing company can provide you with a standard form of an LLC operating agreement that can be modified to meet your specific needs.
4. If required by the state, publish a notice in a local newspaper about your intention to form an LLC. Afterwards, obtain an “affidavit of publication” from the newspaper office and submit it to the LLC filing office.
5. Obtain the necessary business licenses, such as federal employer identification number, a seller's permit, a zoning permit, etc.
6. If you plan to conduct business in other states, register to do business in those states and designate a registered agent in each state.
Bonus Tips and Advice
- Go over the details of the operating agreement with all your business partners to make sure that everyone agrees on every single point.
- Unless your company is very complex, forgo a professional service and set it up yourself.
- Incorporate your LLC in the state where it will be doing business. Though states like Delaware, Nevada, and Wyoming offer some tax and organizational benefits, the benefits become noticeable only when you generate a significant amount of revenue.
Best State to Incorporate
Form your business in the home state if your physical location is in that state and you conduct business mostly there. This way you will avoid fees for “foreign LLC” registration and for retaining a registered agent as you won't need one.
If your LLC has no physical presence in your home state or you plan to do business mostly out of state, consider incorporating in a different state.
- Delaware is one of the country's most business-friendly regions. It has no tax for out-of-state income and charges low initial filing fees and franchise taxes. Having the Chancery Court, designated to deal solely with business issues, allows Delaware to resolve any business disputes much faster than in other states.
- Nevada doesn't tax business income, capital gains, or inheritance. It has no franchise taxes, no requirement for annual meetings and operating agreements, and no information-sharing agreement with the IRS. Nevada is a great place for businesses concerned with privacy.
- Wyoming has no business income or franchise taxes. Its “lifetime proxy” provides even more anonymity than Nevada.
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