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

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

Step 1. Choose a state to form the LLC.

            The first 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 your LLC with the state in which you will operate your business. Generally, majority of small businesses are formed in their home states, which is an easy and less expensive option. There are also a few popular states that attract business owners, such as Delaware and Nevada, because of their pro-business climate and tax benefits. You should consider taxes, fees, business climate and various other factors when choosing a state. Choosing the right state to form your LLC can provide you with financial and legal advantages that may end up saving you significant money in the long run. It is important to weigh the options carefully and pick the best state to form your LLC.

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

Before filing any paperwork with the state, you must choose a unique business name for your LLC that complies with the state laws. It is important to check the availability of the name for your LLC on the Secretary of State website, since most states do not allow duplicates of business names. You should also check the state laws to 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 in the records of the Secretary of State from that of an existing LLC name” and should not mislead the public. In Delaware, your LLC name must contain either the abbreviation “LLC,” “L.L.C.,” or the words “Limited Liability Company,” and may not contain certain words, such as “bank,” “trust,” and “corporation.”

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

If you plan on forming an LLC at a later date, consider reserving your business name with the Secretary of 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 from state-to-state. In California, a proposed name can be reserved for a period of 60 days for a fee of $10. You can reserve the name by filing a Name Reservation Request form with the Secretary of State, and the name is renewable for a maximum of 2 successive 60-day periods. Delaware also requires you to file an application in order to reserve a name. The name reservation will be effective for 120 days for a fee of $75 and is renewable for successive 120-day periods. There is no maximum number of renewals in Delaware.

Step 4. Appoint a registered agent for your LLC.

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

Step 5. File Articles of Organization with the Secretary of State.

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

Step 6. Prepare an LLC operating agreement.

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

Different businesses have different operational requirements. Although there are templates available online to assist you drafting an operating agreement independently, blanket legal documents do not always suit your business or cover all issues and scenarios that might come up in the future. Given the importance and complexity of the operating agreement, it is recommended that you seek the assistance of an attorney in drafting one that is suitable for your business. An experienced attorney will prepare an operating agreement that is fully customized and tailored to your business purpose and help you understand the meaning of different provisions, ensuring the longevity and health of your LLC.

Step 7. Obtain a certificate from the state.

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

Step 8. Take care of other business matters.

            After you receive a certificate from the state, you are only left with one step to opening the door of your business. The state, county, and city officials may require business owners to obtain a business license and other permits.  The type of licenses and permits your business needs depend on the type of business you are going to operate. You should also consider obtaining a federal employer identification number (EIN), which will be required in order to open a business bank account. If you are unsure of the EIN application process or find it burdensome to do it yourself, you can always hire a third party, such as an attorney or business consultant, to handle 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. 

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David Kim| PARTNER

David Kim is a Partner at Parsus LLP. He specializes in corporate and technology transactions, with an emphasis on intellectual property. David has represented a variety of clients from start-ups to Fortune 500 companies in mergers and acquisitions, cross-border investment, financing, and licensing. His clients do business in a range of industries including entertainment, financial services, consumer products, gaming, software, and technology services.

Prior to returning to Parsus LLP, David served as an in-house intellectual property counsel for NBCUniversal, advising on technology and mergers and acquisitions for the various business units of the company. He assisted the company’s corporate development teams in assessing acquisition targets and negotiated NDAs, vendor service agreements, software and hardware licenses, and trial agreements for experimental and prototype technology. David was also one of the company’s primary resources on open source software-related matters.

Before joining NBCUniversal, David co-founded and served as a Partner of Parsus LLP, worked as in-house counsel for start-ups, and was an associate at Winston & Strawn, where he represented clients in intellectual property matters including patent assessment and analysis, IP licenses, and various phases of patent and copyright infringement litigation. At Winston, David also represented clients in general business and securities litigation concerning commercial disputes and business torts.

David received his A.B. degree from Harvard University and his J.D. degree from UCLA School of Law. 

Kristen Lee
Kristen Lee
| ASSOCIATE ATTORNEY

Kristen Lee is an associate attorney at Parsus  LLP.  Her practice is focused on commercial transactions and the various day-to-day legal needs of businesses of all sizes, including business formation, corporate governance, commercial contracts, and mergers and acquisitions. Prior to joining Parsus, Kristen represented corporate clients in high-stakes litigation involving breach of contract, fraud, unfair competition, and other business torts.  

Kristen is a member of the Korean American Bar Association of Southern California.

Kristen received her B.A. degree from the University of Texas at Austin and her J.D. degree from Pepperdine School of Law.  Kristen is fluent in Korean. 

EVELYN SHIMAZAKI
| OF COUNSEL

Evelyn Aguilar Shimazaki is Of Counsel at Parsus LLP. Her practice is focused on the representation of technology companies in intellectual property licensing and commercial transactions, including joint development, manufacturing, procurement, strategic alliances, outsourcing and other services arrangements. Prior to joining Parsus LLP, Evelyn was a Senior Counsel at Apple in Cupertino, California for fourteen years. After Apple, she joined Tesla in Palo Alto, California as Chief Counsel and more recently, Oculus VR, a division of Facebook in Menlo Park, California as a Consultant.  

Evelyn is a Founding Board Member of UCLA Law Women LEAD, an Advisory Board Member of the Lowell Milkin Institute of Business Law and Policy at UCLA School of Law, and a past President and Advisory Board Member of the Philippine American Bar Association of Los Angeles.

Evelyn received her B.A. degree from the University of California, Berkeley and her J.D. degree from UCLA School of Law. A native of the Philippines, Evelyn speaks Tagalog, Spanish and some Japanese.

Ju Park
| MANAGING & FOUNDING PARTNER

Ju is a corporate lawyer by training and an entrepreneur at heart.  After attending the United States Military Academy at West Point for a year where she gained essential life skills including throwing grenades and applying a tourniquet, she graduated from McCombs Business School at the University of Texas majoring in finance.  Ju then graduated from UCLA School of Law where she focused her studies on International Business Law.  After law school, she practiced corporate law and litigation in the Los Angeles and Hong Kong offices of an international renowned law firm, Latham & Watkins, where she advised domestic and foreign clients, including Fortune 500 companies, on various corporate matters including general commercial contracts, corporate finance, IPOs and mergers and acquisitions.

Ju co-founded Parsus in 2009 with a vision to transform the legal services industry to make quality legal advice more available to and affordable for businesses of all sizes while improving the lifestyle and overall happiness of lawyers.  Over the years, and particularly since recently becoming a mother, Ju’s vision for Parsus has expanded to transform our extended community by committing a part of the firm’s profits and resources for charitable purposes.

In her role at Parsus LLP, Ju serves as outside transactional and general counsel to clients of all sizes and across a broad range of industries.  Her clients include domestic and foreign companies to whom she provides practical and cost-effective solutions to their general day-to-day business legal matters as well as major transactions such as mergers and acquisitions, corporate finance and cross-border transactions.  Ju combines her legal expertise with her business acumen to provide practical solutions to her clients’ legal issues without “over-lawyering” their contracts or deals.  Ju’s recent clients have included foreign and US companies acquiring and/or investing in US companies or assets, US companies receiving foreign and domestic investments, US subsidiaries of foreign companies going public, and foreign companies with ongoing US operations.  Ju also enjoys working with like-minded entrepreneurs and start-up executives.