Step by step LLC formation isn't difficult. It may seem so at first glance, but forming an LLC simply involves completing a few tasks and filing paperwork with the state where the LLC is being formed.

General Information About Starting an LLC

An LLC offers flexibility to small business owners and provides liability protection. Structured as an LLC, the company exists separately from its owners/members. This keeps the owners from being held responsible for business debts. If your business sells products and/or services in one state, as a general rule, the LLC will be formed in that state where the company is conducting business. LLCs are referred to as "pass-through" entities, which means the business is not subject to double taxation, which is how a corporation is taxed.

A limited liability company is easily formed, but every state has its own rules, requirements, and procedures to follow to get the LLC approved. Other considerations include the state's initial filing fees for the formation of an LLC, annual filing fees, and annual reporting requirements.

If the LLC will be doing business in more than one state, it may be necessary to register to do business in each of the other states, pay applicable registration fees, and hire a registered agent in each state where the company is authorized to do business. Capital contributions are the amount of cash, promissory notes, property, or services rendered contributed to the company for an ownership percentage in the LLC.

When determining ownership interest, the LLC will issue ownership shares (referred to as units) to its members. The units constitute the member's percentage interest in the LLC. Whenever a vote is required, the members will vote their units in proportion to their individual ownership interest.

LLCs can be single-member entities or have unlimited members. They can be member-managed and operated by the owners or manager-managed with an appointed person or persons managing the LLC.

Steps to Form an LLC

Step 1: Naming the LLC

Several rules apply when choosing a name:

  • The name must be distinguishable from other LLCs, partnerships, and corporations.
  • The name cannot be a duplicate of an existing LLC registered with your state.
  • The name must end with a specific designator or abbreviation such as "Limited Liability Company" "LLC" or "Ltd. Liability Co."

Validate the name through the Secretary of State online database to find out if other businesses are using the same or similar name. If allowed in your state, you may fill out a form and pay a fee to reserve a name. This is convenient if you are not planning to file the LLC formation papers immediately. Length of time for the reservation period and renewal policies vary with each state.

Step 2: Registered Agent

A requirement in every state, a registered agent must be named for the LLC. The registered agent serves as the recipient of official documents on behalf of the company. They will then turn over the legal paperwork to the appropriate person at the LLC.

Step 3: Operating Agreement

Consider the operating agreement as a roadmap that clarifies how the LLC will be governed. Information will include such things as the duties of members and managers, allocation of profits and losses, and procedures for electing managers.

Step 4: Articles of Organization

File the articles of organization with the Secretary of State or other government agency for your state. This is typically a one-page document with information such as the name of the LLC, a statement of purpose, and the name and address of the registered agent. Each state has its own procedures regarding the articles of organization.

Step 5: Public Notice

You may be required to post a public notice of your intent to form a limited liability company.

Step 6: Permits and Licenses

Depending on the type of business you plan to operate, you may need to obtain certain licenses and permits before doing business.

Step 7: Employer Identification Number

The law requires that you obtain a Federal Employer Identification Number (EIN or FEIN). You will use this number when opening business bank accounts, obtaining business credit cards, filing, and paying taxes, handling payroll, and getting financing for your business.

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