Starting a Limited Liability Company (LLC) Checklist
If you are a small business owner, structuring that business as a limited liability company (LLC) can provide you with the liability protection of a corporation without double taxation. LLCs are also subject to fewer management formalities than corporations, which gives the owners more flexibility in how the business operates.
Because it is an independent entity, an LLC is separate from its owners, who can't be liable for its debts. Additionally, since LLCs may be taxed in the same manner as sole proprietorships and partnerships, any profits pass through to you and are not treated as income to the company. That means any business income the company earns will not be subject to the corporate income tax before it is distributed to you and taxed as personal income.
While each state has its own procedures for setting up and maintaining LLCs, the following checklist should guide you through the formation process in most of them.
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Step 1: Name Your Business
Choosing a business name is the first step in starting your LLC. This name should reflect your startup's mission and be easy for customers to remember. Check with your state's rules about business names. It shouldn't be the same as any other business in your state. Many entrepreneurs choose to register a “doing business as" (DBA) name. This allows you to do business under a different name from your LLC if needed.
Any LLC you form will need to register with the state using a unique, easily identifiable name. While you may have a name in mind when you start organizing your LLC, you may find that another registered business already uses it. The state agency responsible for registering LLC is usually the secretary of state's office, which should have a searchable list of names already in use on its website.
Additionally, most states have naming requirements when it comes to LLCs. The most common rule is that your name should not include certain words that imply you are in a specific business, like banking or insurance. Another common requirement is that the name needs to have terms that describe the business as a limited liability company, such as "LLC."
Finally, you may want to investigate whether your name of choice is the subject of a federal or state trademark and whether it is available as an internet domain name.
Step 2: Prepare Your LLC's Operating Agreement
An operating agreement is like the bylaws of an LLC. It describes how the business will run and who's in charge. This includes whether it's member-managed or managed by a board of directors. This document isn't always required by state law, but it's smart to have. It makes sure all LLC members know their roles and responsibilities.
An essential step in the formation of an LLC is the drafting of its operating agreement. While some states do not require that an agreement be filed with the secretary of state, it is still a good idea to have one in place before you start operations.
Your operating agreement will set out the rules that the owners, often known as members, must follow. It will also describe how the members will manage the business. A well-drafted LLC operating agreement can help prevent future litigation by explaining how to resolve disputes involving the owners and managers.
Operating agreements often include the following information:
- The shares of each member of the LLC
- The members' rights and responsibilities to each other and the LLC
- The LLC's management structure and each member's role in the company
- How the business profits will be distributed among the members
- The distribution of voting powers among the members
- Rules on scheduling and conducting meetings and votes
- What happens when a member leaves the LLC
While you can craft an LLC operating agreement without the help of a lawyer, if you are starting an LLC with several other members it is usually a good idea to consult with an attorney to ensure that the operating agreement adequately protects your interests.
Step 3: File Your Articles of Organization With the State
Filling out your LLC's articles of organization should be a relatively simple affair. Many states make a form available on the website of their secretary of state, and you will only need to fill in the blanks. Most of the required information is relatively basic, and you should not need to include specific details on the LLC's management or how ownership shares will be allocated.
The requirements vary from state to state, but most states want the following information:
- The LLC's name and address
- The names and contact information of the owners
- The purpose for which you formed the LLC
- The name and address of a registered agent authorized to receive legal documents on behalf of the company
You will usually need to pay a fee when you submit your articles of organization to the state. If you plan on forming an LLC that operates in many states, you will need to file articles of organization in each state.
To officially create your LLC, you must file the articles of organization. This is like the articles of incorporation for a corporation. This step makes your business a legal entity. Each state has its own rules and filing fee for this, so check your state's guidelines. Always maintain good standing by making sure you're up-to-date with franchise taxes and other important requirements.
Step 4: Receive Your State Certificate of Organization
Once the state has approved your filing, you should receive a certificate signifying registration. This document is commonly called a certificate of organization, LLC certificate, or a certificate of formation. The certificate of organization is a legal document stating that the LLC was properly formed and that the state recognizes it as a separate legal entity.
Once you've filed your articles of organization and paid the filing fees, the state will review your application. If everything is in order, they'll send you a certificate of organization. This is sometimes called an LLC certificate or a certificate of formation. This proves your LLC is official.
Step 5: Apply for an Employer Identification Number
An employer identification number (EIN) is a unique tax identification number issued by the Internal Revenue Service (IRS). This number is used for filing tax returns, opening bank accounts, and other financial transactions. It's free to get an EIN from the IRS, and it's an essential step for your new business.
If your LLC has more than one member or plans to hire employees, you will need an EIN. If you plan to operate a single-member LLC and not have any employees, you can file your tax returns using your own Social Security number. However, most single-member LLCs choose to use an EIN because it keeps owners from disclosing their personal Social Security numbers on business accounts.
You can apply for an EIN for free on the IRS website using the certificate of organization issued by your secretary of state. If you apply for an EIN online, the IRS will issue your number to you immediately. You can also mail or fax a completed Form SS-4 to the IRS. If you fax in your form, you should receive a response in a week or two. If you file by mail, it can take four to five weeks to receive your number.
Step 6: Open a Business Bank Account
Opening a business bank account is a vital step for entrepreneurs. You will need your EIN to open this account. Doing so ensures a clear distinction between personal assets and business funds. This is essential for both legal and financial clarity. With a business bank account, it becomes easier to manage finances for tax purposes and avoid paying corporate taxes. By having a dedicated business account, tracking these funds and ensuring accurate tax reporting becomes more straightforward.
Step 7: Get Any Necessary Business Licenses and Permits
Depending on where your LLC is located and the type of business you are operating, you may need to seek licenses and permits from the state before you begin operations. Additionally, some cities, counties, and townships have their own licensing and permitting requirements for businesses.
Licensing and permitting requirements are most common for businesses operating as restaurants, selling food, or selling alcohol. Still, you should check with your local government to make sure you are complying with all of the local rules before you open for business.
Different types of businesses need different licenses. Check with local, state, and federal offices to see what's needed for your business. Don't forget to renew these when required to keep doing business legally.
Step 8: Get Legal Help
Starting an LLC involves many steps. It's smart to get legal advice, especially if this is your first time starting a business. A professional can guide you through complicated areas and help you decide whether a C corporation, general partnership, or nonprofit organization would be a better choice for you than an LLC. They can help you plan your small business structure and register your business entity with the state.
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