Why Do I Need an LLC: Everything You Need to Know
Why do I need an LLC? You’ll get enhanced credibility by formally creating an LLC for your business and you’ll enjoy limited liability protection.3 min read
Why do I need an LLC? First and foremost, you’ll get enhanced credibility by formally creating an LLC for your business. Furthermore, you’ll enjoy limited liability protection, as LLC owners cannot be held personally liable for the debts or obligations of the business. This will help you in the event that your business is sued.
While forming an LLC might seem like a lot of work, it is one of the easiest types of business structures to form. There is very little paperwork involved; the costs associated with forming an LLC will vary depending on the state you are registering in, but most states charge a minimal amount to form your LLC.
Who Should Form an LLC
Not everyone should form an LLC. Specifically, the following types of businesses are unable to register as an LLC:
- Insurance companies
These aforementioned business entities are simply not allowed to form LLCs. Moreover, some states, including California, prohibit certain professionals from forming LLCs. These professionals include doctors, accountants, architects, and licensed health care professionals.
But if you don’t fall into any of these categories, then you should strongly consider forming an LLC if you want to enjoy the limited liability protection, pass-through taxation, and enhanced credibility that it offers.
How to Form an LLC
There are general requirements that every state has when forming your LLC. These requirements include:
- Choosing your business name
- Choosing a Registered Agent
- Drafting the Articles of Organization
- Drafting an Operating Agreement
- Obtaining an EIN, if required
The first thing you have to do is choose an appropriate business name. Each state has requirements (generally all the same) that indicate you must choose a name that is not already being used in that state. Other requirements for your business name include the fact that it must obtain the LLC business designator at the end of the name and must not include prohibited terms (you can visit your state’s website for a full list of prohibited terms).
After you’ve chosen an available and compliant name, you’ll have to obtain a registered agent. Most states allow you to be your own registered agent so long as you live in that state. If not, then you will need to obtain either a person who resides in that state or a business that is authorized to do business in that state to be your agent. The agent will send and receive important legal papers on your behalf, i.e., subpoenas, complaints, etc.
Next, you’ll need to file the Articles of Organization with your state’s Secretary of State’s office and pay an applicable filing fee. This fee can range from $50 to $500 depending on the state. This document shouldn’t take long to fill out; some states even allow you to fill in the blanks and submit it online.
Be mindful that some states have additional requirements prior to filing this document. Specifically, some states provide that you must place a publication in your local newspaper over a period of several weeks before filing the Articles of Organization. This publication will specify your desire to create an LLC, while also providing the LLC’s name. This will give people an opportunity to potentially object to your business name, particularly for those who might have a similar business name that is already in use in that state.
After you’ve filed the Articles of Organization, you’ll want to draft an Operating Agreement. This document will specify the duties of all LLC owners, procedures, and other significant business item directives, i.e., how an owner can transfer his or her membership interest, what happens if a member dies or becomes disabled, voting rights of all members, percentage of ownership for each member, etc. Note that this agreement is not required in most states, but it is highly advisable and beneficial. If the agreement is properly executed and signed by all LLC owners, then it will become legally binding and can help prevent future disputes among owners.
After you’ve drafted your Operating Agreement, you might want to obtain an EIN (Employer Identification Number). If you plan on hiring employees or if you operate a multi-member LLC (with or without employees), this ID number is required. If, however, you operate a single-member LLC and have no employees, then this ID number isn’t required. While this number might not be required for you, keep in mind that most banks require this number before opening a business bank account for your LLC.
If you need help forming an LLC, you can post your legal need on 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, Menlo Ventures, and Airbnb.