Many business owners opt to start a LLC, or limited liability company, to protect their personal assets from business debts and financial obligations. This process can be completed by an accountant or attorney or can be done independently by the business owner. Because each state has different LLC formation rules, it's important to investigate the specific laws in your state before proceeding.

Naming an LLC

While each state has its own LLC naming laws, you will always need to choose a name that is not already used by another business in your state. In general, consider the following guidelines when choosing an LLC name:

  • It should be distinctive and easy to remember.
  • It should be simple to pronounce and spell.
  • It should be suggestive of the purpose of your business.
  • It must include the words LLC, L.L.C., or limited liability company.

Once you've chosen a name, you can search the secretary of state database online to make sure it's not already in use. In some states, you can reserve a name so that no one can use it before you officially register your LLC. This service typically carries a small fee, but details vary by state.

After registering an LLC, you may also want to trademark your name, which provides national protection from use by other businesses. Trademark protection is managed through the U.S. Patent and Trademark Office and carries a fee that ranges from $275 to $325.

Structuring Your LLC

An LLC can either be member-managed, in which all owners have a hand in running the business, or manager-managed, in which the owners appoint a professional manager who administers daily business operations. A member-managed structure is the most common. The management structure should be designated in your articles of organization, but if you do not do so the LLC will be member-managed by default.

The articles of organization are submitted to the secretary of state to register your LLC. This simple document includes the name of your business, its legal address, the purpose of the LLC, names of members, and the structure of your business. The filing fee ranges by state between about $100 and $300.

You'll also need to choose a registered agent, which is an individual or business who agrees to accept legal documents and service of process on behalf of the business. This can be one of the LLC members or a professional registered agent, as long as he or she has an address in the state where your LLC is established.

Depending on your location and type of business, you may need to acquire specific business licenses and permits. You can learn more about the requirements at your local county clerk's office. If your LLC has more than one member or has employees, you'll need to register for an employer identification number (EIN) with the IRS. Single-member LLCs can pay taxes using the owner's Social Security number. You can get an EIN for free by applying online with the IRS. You'll need this number to open a bank account and conduct other financial business for the LLC.

Creating an Operating Agreement

If your LLC has more than one member, creating an operating agreement puts policies and procedures for your business in place. This document can help protect your status as an LLC and thus protect your limited liability; define how profits and losses will be distributed among members and other financial aspects of the business; establish membership percentages; detail member rights and responsibilities; establish a voting structure and rules for holding annual meetings; and detail buy-sell provisions of membership shares.

You may want to retain the services of a qualified business attorney to help you create your operating agreement and ensure it is in accordance with the laws of your state. If you do not have an operating agreement in place, default state LLC laws will apply in the event of a membership dispute.

LLC Advantages

One of the primary advantages of the LLC structure is tax flexibility. The default is a pass-through entity in which the profits and losses are reported on each member's individual tax return. The LLC itself is not subject to corporate taxation.

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