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.