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 held liable for its debts. Additionally, since LLCs may be taxed in the same manner as sole proprietorships and partnerships, any profits are passed through to you and 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
Any LLC you form will need to be registered 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 LLCs—usually the secretary of state's office—typically has 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 requirement is that your name 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 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 business will be managed. 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:
- How much of the LLC is owned by each member
- 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 for 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 be required to pay a fee when you submit your articles of organization to the state.
If you plan on forming an LLC that operates in multiple states, you will need to file articles of organization in each state.
Step 4: Receive Your State Certificate of Organization
Once the state has approved your filing, you should be issued a certificate stating that your LLC has been registered. 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.
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.
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: Obtain Any Necessary 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.
Additional Questions? Contact an Attorney
Organizing your business as an LLC can be a complex undertaking, primarily if multiple owners have invested a lot of their personal funds in the company. That's why you want to be sure you have taken all the necessary steps to ensure your LLC stands up to legal scrutiny and that your personal interests are protected in the formation documents. Working with a local business attorney can help put your mind at ease and make sure you will have a say in the management of your LLC and that your assets are protected from liability.
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