Steps to Start an LLC: Everything You Need to Know
Forming an LLC may be more involved than setting up other business structures, but forming an LLC assures owners that their personal assets are protected.3 min read
2. How to Start an LLC
The steps to start an LLC do not require that you hire an attorney to set up the company. This is because the process involving state requirements are self-explanatory.
Creating a Limited Liability Company
A limited liability company combines the tax benefits of a sole proprietorship and provides the limited liability protection of a corporation. Unlike a partnership, an LLC can have multiple owners who are not personally liable for the debts or liabilities that the company incurs.
Forming an LLC may be more involved than setting up other business structures, but forming an LLC assures owners that their personal assets are protected. Raising capital is thus usually easier for an LLC.
An LLC is different from a corporation regarding taxes in that an LLC is a pass-through entity and not subject to double taxation. With pass-through taxation, the LLC's profits and losses are passed through to the individual owners of the business. They must file the information with their personal tax return. This may result in an owner paying fewer taxes because the profits are taxed only once at the personal level.
Most states do not require an LLC to provide annual paperwork or have specific administrative procedures. LLCs are not required to hold annual meetings or document meetings. It is recommended, however, that major business proceedings are documented and some form of formal procedures are in place, such as scheduling an annual meeting to maintain and protect your LLC status.
How to Start an LLC
Step 1: Select a Name for the LLC
Each state has its own rules regarding naming. For example, no two businesses can have the same name, and the name cannot be deceptively similar to an existing LLC in the same state where the LLC is being formed. Search the Secretary of State (SOS) website to check name availability. Some states offer the option to reserve a name for a set period.
The company name must signify its status by including "LLC,", "Limited Liability Company," "L.L.C," or something similar at the end of the name. Also, states have certain prohibited words. Examples include "education," "university," and "insurance."
Step 2: Prepare the Articles of Organization
The articles of organization lists important information, such as the name of the business, its address, and the names of the owners/members.
The articles of organization, also referred to as "certificate of formation" or "certificate of organization," are filed with the SOS where the LLC is being formed along with applicable filing fees. Some states allow filing online, but others require that you submit the paperwork to the SOS. Once filed and approved, you will receive a certificate of organization confirming the LLC in around 10 to 20 business days via your registered agent.
Step 3: Designate a Registered Agent
This is a requirement in most states. A registered agent is also referred to as the "agent for service of process." Other titles include "statutory agent" and "resident agent." They handle legal correspondence on behalf of the LLC. Rules that apply to registered agents include:
- A registered agent may be a member of the LLC. The role can also be outsourced to a company that provides the service.
- Only adults or a company with a physical street address in the state where the LLC is formed may be a registered agent. A PO box address is unacceptable.
- The agent is not required to be an owner or affiliated with the LLC.
Step 4: Publish a Publication Announcement
Check if your state has a "publication requirement." If so, you must announce in a local newspaper your intention to form an LLC.
Step 5: Create an Operating Agreement
Create an operating agreement that outlines the rights, roles, responsibilities, and ownership interest of each member.
Step 6: Get Your Employer Identification Number
Submit Form SS-4 to the IRS to receive an employer identification number.
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