How to Form an LLC: A Simple Guide for New Business Owners

A limitedliability company, also referred to as an LLC, is a popular business structurethat protects business owners from being personally liable for their companies’obligations. An LLC is considered to be one of the most flexible and easiestbusiness forms to manage. According to the Internal Revenue Service, there areabout 2.4 million LLCs in the United States, and their numbers increase fasterthan any other business type. In this article, we will provide you with asimple step by step guide to form an LLC.

Step 1. Choose a state to form the LLC.

            Thefirst thing you should decide is in which state you would like to form the LLC.You can choose to form your LLC in any state, but you’ll also have to register yourLLC with the state in which you will operate your business. Generally, majorityof small businesses are formed in their home states, which is an easy and lessexpensive option. There are also a few popular states that attract businessowners, such as Delaware and Nevada, because of their pro-business climate andtax benefits. You should consider taxes, fees, business climate and variousother factors when choosing a state. Choosing the right state to form your LLCcan provide you with financial and legal advantages that may end up saving yousignificant money in the long run. It is important to weigh the optionscarefully and pick the best state to form your LLC.

Step 2. Choose a unique and availablecompany name for the LLC that complies with the state rules.

Before filingany paperwork with the state, you must choose a unique business name for yourLLC that complies with the state laws. It is important to check the availabilityof the name for your LLC on the Secretary of State website, since most statesdo not allow duplicates of business names. You should also check the state lawsto see if there are any restrictions on the name of the business. For example,California law provides that: “a proposed LLC name must be distinguishable inthe records of the Secretary of State from that of an existing LLC name” and shouldnot mislead the public. In Delaware, your LLC name must contain either theabbreviation “LLC,” “L.L.C.,” or the words “Limited Liability Company,” and maynot contain certain words, such as “bank,” “trust,” and “corporation.”

Step 3. Reserve a name if you plan onstarting your business on a later date (optional).

If you plan on formingan LLC at a later date, consider reserving your business name with the Secretaryof State. For a small fee, you can reserve a name for a limited period of time.The length of the reservation period, filling fees, and renewal policies vary fromstate-to-state. In California, a proposed name can be reserved for a period of60 days for a fee of $10. You can reserve the name by filing a NameReservation Request form with the Secretary of State, and the name isrenewable for a maximum of 2 successive 60-day periods.Delaware also requires you to file an application in orderto reserve a name. The name reservation will be effective for 120 days for afee of $75 and is renewable for successive 120-day periods. There is no maximumnumber of renewals in Delaware.

Step 4. Appoint a registered agent foryour LLC.

A registeredagent, also referred to as agent for service of process, is an individual or acompany who receives notice of lawsuits, subpoenas, and correspondence from theSecretary of State on behalf of the LLC. Some companies name the founder or anexecutive officer as a registered agent and some companies hire a certifiedregistered agent company. A registered agent must have a street address and an officein the state where the LLC is formed and be available during regular businesshours. If the registered agent is an individual, the agent must be at least 18years old.

Step 5. File Articles of Organizationwith the Secretary of State.

Generally, youare free to form an LLC in any state, as long as you comply with the state’srules for forming an LLC. If you operate your business in another state or yourbusiness is located in another state, however, you are also most likely requiredto register your LLC with those states as well.Each state has its own rules on what information must be in thearticles of organization, and the filing fees vary by state as well, typically rangingfrom $30 to $200. In California, the current filing fee is $70 with an optionto expedite the processing time for an additional fee. The Articles of Organizationmust include the following information: LLC name, its purpose, information onhow it will be managed, its address, and the name and address of its registeredagent. In Delaware, you must file a Certificate of Formationof Limited Liability (which is just another name for articles oforganization) with the Delaware Division of Corporations. Current filing fee is$90, and the Certificate must include the LLC name and the name and address ofthe LLC’s registered agent.

Step 6. Prepare an LLC operatingagreement.

An operatingagreement is not required by state laws, but is highly advisable. Unlike anLLC’s Articles of Organization, which is generally a short form based on staterequirements, the operating agreement should be significantly more complex andin-depth, addressing numerous administrative, financial and functional mattersof the LLC, as well as setting forth responsibilities and rights of LLCmembers. Things get more complicated if your LLC has multiple members, as itmakes it more likely that members may have disagreements about a financialdecision or the future of the business. Having an operating agreement in placeearly on can definitely help minimize and resolve future disagreements.

Different businesseshave different operational requirements. Although there are templates availableonline to assist you drafting an operating agreement independently, blanketlegal documents do not always suit your business or cover all issues andscenarios that might come up in the future. Given the importance and complexityof the operating agreement, it is recommended that you seek the assistance ofan attorney in drafting one that is suitable for your business. An experiencedattorney will prepare an operating agreement that is fully customized andtailored to your business purpose and help you understand the meaning ofdifferent provisions, ensuring the longevity and health of your LLC.

Step 7. Obtain a certificate from thestate.

Once the LLCformation documents are filed and approved by the state, you will receive acertificate or other similar document that confirms the official existence of yourLLC. Once you receive this certificate, you are free to proceed to obtain otherlicenses and permits that are required to operate your business.

Step 8. Take care of other businessmatters.

            Afteryou receive a certificate from the state, you are only left with one step to openingthe door of your business. The state, county, and city officials may requirebusiness owners to obtain a business license and other permits.  The type of licenses and permits yourbusiness needs depend on the type of business you are going to operate. You shouldalso consider obtaining a federal employer identification number (EIN), whichwill be required in order to open a business bank account. If you are unsure ofthe EIN application process or find it burdensome to do it yourself, you canalways hire a third party, such as an attorney or business consultant, tohandle the application for you.

            Although seemingly straightforward, the process of starting a business requires more than simply registering the LLC with your chosen state. Decisions must be made on a number of important issues with which a new business owner may not be familiar, including business and tax laws and contract drafting. In most cases, you will need the services of an attorney to help with the process. Engaging an attorney will enable you to focus on other aspects of the business instead of spending time learning the legal processes. In addition to preparing a thorough and customized operating agreement and supporting post-formation efforts such as applying for an EIN, an attorney can provide insights on whether an LLC is the best structure for your company and which state is most suitable for your purposes and interpret local laws and tax regulations. A qualified attorney will help ensure that your business gets off to a smooth start and is well-protected from liability.

Legal Disclaimer: The  information in this article is provided for general informational and educational purposes only.  It is not intended to be legal advice and does not create an attorney-client relationship.