Setting Up an LLC: Everything You Need to Know
In setting up an LLC there are a variety of steps. You will need to decide upon a name, designate a registered agent, and file incorporation documents. 8 min read
Setting up an LLC
What is an LLC?
LLCs are common legal forms for small and new businesses. LLCs are created based on state statute. The main advantage of LLCs are that the owners are protected from personal liability.
LLCs have many similarities with partnerships. However LLCs are similar to corporations in that owners are protected from personal liability but are different from corporations in that LLCs don’t have a variety of harsh fees and filing requirements. The LLC’s taxes pass-through to the owners. The LLC itself is not taxed, unless a different method is specified. LLC formation procedures are different state to state. However the main steps are the same.
You don’t have to file yearly or go through various other paperwork in the bulk of states. However you ought to set out certain procedural and record-keeping formalities, like meeting annually, to make sure your LLC is secure.
Many states require certain taxes and yearly fees that can reduce a LLC’s benefit.
Advantages of choosing LLC as your Business structure
A major benefit of LLCs are pass-through taxes. The LLC’s profits and losses are sent from the business to the owners for taxation purposes and reported on individual tax filings. LLCs can avoid being double-taxed at both the company and individual level, resulting in often significant tax savings, as the taxes are sent directly to the individual.
Furthermore, LLCs protect their owns from individual liability for the LLC’s obligations. For those who want to have liability protection but avoid large amounts of filings, LLCs are an excellent option.
Steps to form an LLC
LLCs are created based on the particular procedures of each state. Because of this, the initial step in forming an LLC is deciding where you want to form the LLC.
Delaware is a popular choice because of the state’s highly advanced regulatory framework. If you instead form a LLC where the LLC will operate, then you will save however many fees and complex steps.
If the LLC is going to be active in multiple states then you may need to be registered in every state you are active in. The registration process usually consists of registering with the state’s Secretary of State as well as submitting various fees. In order to register, you need to select a unique name for your business that fits the state’s LLC naming rules. You also need to send in Articles of Organization or other filings, as well as submit a filing fee. The fee varies state by state from $800 to $100.
Many states also have other procedures for registering. Search the Secretary of State’s corporate sector’s website to find the steps and costs of registering. You also ought to consider making an operating agreement. The operating agreement determines the duties and rights of the LLC’s members.
You don’t have to use a lawyer’s services in setting up your LLC, but it can be beneficial for a lawyer to look over your filings to ensure you are well protected. In some states you will also need to publish your notice of LLC formation intent.
Lastly, you also ought to get the needed state licenses which, depending on state and what your LLC does, might be needed to operate.
Choose a Name for Your LLC
Your LLC’s name needs to fit the state’s LLC naming requirements. Normally these requirements are set by the Secretary of State’s corporate department.
- The business can’t have the same name as a different LLC registered in the state.
- The business’ name has to have a form of LLC at the end. Forms include “LLC”, “L.L.C.”, “Limited Company”, or “Limited Liability Company.”
- The LLC’s name also can’t have restricted words (ex. bank, city, corporation, etc.). States vary on restricted words.
- You also ought to go to the U.S. Patent Office website and search to make sure you are not violating someone’s trademarks.
- Do a search of the internet as well for your desired name. You can find if there are other businesses which might cause conflicts or confusion.
- You may not want to choose a name that might limit your business’ expansion in the future.
- See if a “.com” version of your domain name is available (as compared to other domain providers).
- Each state has a process for confirming your desired name’s availability. Contact the state to find out how.
- If you wish to have your LLC use a different public name than its legal name, you might want to send in a “DBA” (doing business as) filing.
- For a small fee, you can reserve an LLC name for a short time before you file the formal articles of organization.
- Remember that is important to make sure your desired name violates no trademarks.
After you have selected and confirmed a name for your business, you will be able to register by submitting the articles of organization to the state’s department that oversees LLCs.
File Articles of Organization
After choosing a name, the first major step in creating your LLC is by filing its articles of organization with the state corporate department. Although your incorporation filing is called articles of organization in many states, in some other states it is called an organization certificate or a formation certificate.
You should also consider making a LLC operating agreement. While the law does not demand it, it is helpful for determining the business’ operating structure as well as the duties, ownership, and obligations of the LLC’s members. It is important to file the articles of organization. It protects your LLC’s status as an LLC were you to face a court dispute and prevents you from needing to use the state’s default procedures for operation.
A drawback of LLCs is that, compared to sole proprietorships and partnerships, when you file your incorporation documents you need to submit a filing fee. The filing fee is usually small in many states, about $100, but some states like California make LLCs more expensive by charging a $800 yearly tax.
The formation certificate itself is straightforward and relatively easy to prepare. Many states have a default form you can just fill in. You usually just need to put down the LLC name, address, and occasionally all the owners’ names (“members”). Usually the LLC owners themselves can all sign and draft the documents, or designate a single person.
In the articles you also have to designate a registered agent, often a LLC member, that will be the person for the LLC’s service of process. The registered agent will be served the legal documents if the LLC is sued. Many states, like California, also require the articles of organization to state, through a checked box, whether the LLC is going to be managed by just one person, more than one person, or all the members.
Create an LLC Operating Agreement
It is very important to create an operating agreement, even when operating agreements are not required by the state. The agreements don’t have to be filed with the state.
The LLC’s operating agreement determines the business’ procedures as well as the duties and obligations of the owners. The operating agreement usually includes:
- Percentage ownership of each member in the LLC.
- The duties and obligations of each owner.
- Each member’s voting strength.
- The way profits and losses are distributed.
- The LLC’s management style.
- How meetings will be held and votes counted.
- The procedures for when member interests are sold or if a member dies or is disabled.
The operating agreement also should clarify the following important points:
- What kind of contingencies or punishments are there if members don’t provide their capital.
- If the owners, or securities classes, are preferred in liquidation or in distributions.
- The way officers are determined.
- Liability protection for the LLC’s active managers.
- The process for closing the LLC.
Publish a Notice to form an LLC
Some states also need you to publish in a local news outlet a statement that you are intending to create a LLC. These states usually require the statement to be published multiple times over a few weeks. Afterwards, you will then send a publication affidavit to the state’s LLC division. The local newspaper can assist you with filing the affidavit.
Get the required Business Licenses and Permits
It is also important to note that you ought to get the proper permits and licenses you’re your business before you start operating. These may include a general license (certificate of tax registration), zoning permits, sellers’ permits, and EIN (employer ID number issued by the IRS).
Analyze the Issues of Raising Money from Investors
For LLCs that wish to raise capital (ex. venture capital, family, angel investor, etc.), you need to remember that if the LLC sells shares to people it will probably bring in securities laws. You ought to find legal advice to assist you with getting an exemption for private placement that allows you to get around difficult requirements otherwise for filing.
The investors ought to be sophisticated, accredited, and acknowledge the risks of investing in the LLC (including being ready for the possible loss of their whole investment).
Investor rights should be straightforwardly written in the LLC’s incorporation documents or a separate investors contract.
Obtain an Employer Identification Number (EIN)
An IRS EIN is needed if you want to have LLC employees. You can easily use the IRS’s free online Form SS-4 to get an EIN. An EIN is often required for opening business accounts.
Mistakes to avoid when setting up your LLC
If you choose the wrong kind of business structure, you may end up getting double-taxed on the business and personal levels (ex. sole proprietor being a C-corporation). If you want to divide profits unevenly, you will not be able to do so if you choose a S-corporation rather than a LLC.
Forming your company in low-fee and low-tax states like Delaware or Nevada usually benefits only big corporations. For companies that have fewer than five owners, you should form the LLC where your company is physically active. You will have to deal with a lot of hurdles and costs to otherwise register as a out-of-state company, for example it being hard to open business financial accounts, getting the registered agent, and foreign entity fees.
You should also take care to not start a business without getting the required licenses. It is important to follow regulations on the local, state, and federal levels to avoid legal problems.
To make sure your LLC is complying with the LLC rules, you need to also ensure that:
- Business and personal funds are kept separate.
- When signing documents, use your business title rather than just your personal name.
- File the business’ “DBA” (doing business as).
- File the yearly reports to the state when needed.
- If active in states outside the state you incorporated in, register as a foreign entity.
- Use an amendment article to keep your company current with changes.
If you break the law or commit fraud, the personal liability protective aspect of LLCs and corporations will not protect you. Rather, you are then personally liable for the results of your unlawful act.
Remember that your business may not be too small to form as a corporation or LLC.
If you remain a sole proprietorship, your individual assets are at risk of being taken for your company’s debts. Incorporation as a LLC will separate your business and personal assets and therefore keep you from personal liability.
If you need help with forming a limited liability company, you can post your legal need to 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, Stripe, and Twilio.