Forming an LLC is a popular business structure whether you’re a startup or are already operating a sole proprietorship. Here we list the legalities for how to form an LLC.
Let’s face it. Starting a business is scary and stressful – but it can also be exciting. Fortunately, forming an LLC is straightforward, quick, and has many perks. Here’s what you should know:
Why should I choose an LLC structure?
- One of the most attractive benefits of an LLC is that it offers owners (called members) personal liability protection. That’s because an LLC is viewed as a separate entity from its owners and creditors cannot pursue members’ personal assets to pay the business’ debts.
- Tax incentives: you’ll be taxed on your share of profits only, which are filed on your personal taxes.
- Owning an LLC can enhance the credibility of your business, making your more appealing to potential customers and investors.
- It can be a good stepping stone before moving onto other bigger business structures like a corporation.
Although there are disadvantages to LLCs, the many advantages outweigh the drawbacks. Some states charge extra fees for operating an LLC and transfer of ownership may be harder than with a corporation.
LLCs are easy to form, but there are some legalities and administrative tasks you need to complete. To help you form your LLC successfully and comply with the law, follow these 6 steps:
6 Steps to forming an LLC
1. Decide on and choose your state
Although you can form your LLC in any state even if you don’t plan on doing business there, most startups choose the state in which they live. If your business is formed in a state where it will not operate, you will have to register it as a “foreign LLC”, which can potentially increase your administrative and formation costs. That’s because costs, taxation and LLC laws vary from state to state.
2. Name your LLC
The next step is to pick an available name for your business. There are some legalities regarding naming your LLC you have to comply with. Your name:
- Must end with “LLC”, or “Limited Liability Company” or a permitted abbreviation like LLC or L.L.C.,
- Cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.), and
- Restricted words (like Bank, Attorney, University) may require additional paperwork and a licensed person, like a doctor or lawyer, to be part of your LLC.
- Your business name should not be similar to an LLC or other business entity that’s already on the Secretary of State’s records. You can conduct an LLC name search on your formation state’s website to verify whether your desired name is available. Also do a thorough internet search on the name to see if other companies use that name or something similar.
- Check on the availability of getting the domain name (.com) associated with your business.
- Conduct a trademark search on uspto.gov to ensure you aren’t violating another business’ trademark.
- If you want to use a name other than your formal LLC name publicly, you may want to file a DBA (Doing Business As). Also known as a fictitious name, assumed name, or trade name, a DBA is useful if, for example, your company name and website name is not the same. Most states require you to register your DBA if you use one.
When you form an LLC, choosing a name for your business is a big undertaking. Invest the time to do it properly and you’ll prevent potential legal consequences and expenses in future.
3. Choose a registered agent
A registered agent, also known as an agent for services of process, or statutory agent, is someone who receives legal notices (for example a summons complaint) and tax documents on behalf of an LLC. While you can opt to serve as the registered agent or appoint a friend or colleague, you will want to consider hiring a registered agent for this side of the business. Why? You would not want to risk the chance of the registered agent mishandling these often time-sensitive documents or not be available to receive them. In most states the registered agent must be 18 years or older, have a physical address (not a PO Box) in the state where business is conducted and be available during regular business hours.
4. File your LLC with the State
To make your LLC officially exist, you will need to file LLC formation documents, known as Articles of Organization, or Certificate of Organization, or Certificate of Formation, with the Secretary of State’s office. You can do this on your own, with the help of a lawyer or through a professional LLC filing service. Filing fees vary per state. Most states offer online filing.
5. Create an LLC Operating Agreement
This is a crucial step for all LLCs, whether single-member- or multi-member. Why? An Operating Agreement is the only way for you and your members to legally define your roles, the LLCs management and ownership structure. In addition, it gives you something to go back to in the event of a dispute.
This document will clearly define for example the division of ownership, who has authority to do what, how members can be added and how profits and losses will be split. Even if you are the only member it is important to have an operating agreement as it shows you recognize the LLC as a separate entity.
It is highly recommended to have your operating agreement reviewed by your attorney to make sure you have all your bases covered. Although you don’t need to file it with the Secretary of State, a good idea is to have it notarized and then kept in a safe space. Each LLC member should receive a copy, which should be kept confidential.
6. Obtain an EIN
You will now apply for an Employer Identification Number (EIN), also referred to as a Federal Tax Identification Number. This is the identification number your LLC will use on its bank accounts, income and employment tax filings and when you’re providing information on your employees. You can apply for an EIN online, by fax, mail or phone. We recommend applying online for this free service offered by the Internal Revenue Service