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An LLC (limited liability company) is a type of business structure in the United States. It has in recent years become the most popular legal structure for small businesses seeking flexibility and limited liability protection. In this post, we’ll discuss how to form an LLC. But first, let’s start with some of the basics.
LLCs combine limited liability and pass-through taxation. That means an LLC offers limited liability protection of a corporation where LLC owners are not responsible for the company’s liabilities or business debts. And, the owners of an LLC pay taxes on business profits through their individual taxes only rather than being taxed both at the personal level and the business level.
Once a business becomes a limited liability company (LLC), it has its own separate legal identity from its owner(s). Because of this, LLCs make ideal models for business owners who want to avoid the extra paperwork and taxes of a corporation while also protecting themselves from the individual responsibility of any business debts or lawsuits that could occur. So when does a business need to become an LLC?
Learning how to form an LLC may seem intimidating, but it’s a relatively straightforward process. Requirements vary from one state to another, so you want to familiarize yourself with specific state laws before proceeding.
In this comprehensive guide on how to form an LLC, we break it down so you can understand the entire process and have an easy time starting an LLC. Generally, here are a few basic steps on how to form an LLC:
Choose a Name for Your Business
Your company name must also include the phrase “limited liability company” or an abbreviation of it (LLC or L.L.C.)
Now that you’ve decided to join the LLC bandwagon, it’s time to choose a business name. You want to choose a marketable LLC name that will attract customers. While marketing might be your top priority when naming your company, the name must meet state law requirements.
It helps to do your research to check if your desired LLC name is available. Online search engines and social media can come in handy, but you’ll need to complete a business name search to make sure the name is unique.
In general, state laws require that you choose a unique business name that’s not previously trademarked. If a business on the other side of the country offers goods and services that are entirely different from your business, you might be able to trade with the same name without infringing on their trademark. Corporate Veil
However, that occurs in a few rare exceptions, and there are plenty of other factors involved. You’re better off finding an original LLC name. Choosing a unique name can help avoid confusion with existing LLC companies. You may also want to consider whether a domain name is available that matches your business name.
Most states also prohibit using certain words that imply you’re in a particular business, such as banking, law, and insurance, which may require additional paperwork and a licensed individual. Check out our guide on choosing LLC titles or LLC holding companies.
Be sure to review your state’s LLC naming requirements and determine if the name you want is available by visiting the website of the Secretary of State or any other agency responsible for business listings. Often, for a small fee, most states allow you to reserve the company name you’ve chosen for a short period until you file your articles of organization. That way, you don’t have to worry about someone else registering a company under your chosen business name before you can officially launch your business. (NAICS)
While many states provide an online search tool for business names, your search will only show businesses registered in your state. To determine if another company has federal trademark protection, you’ll want to visit the United States Patent and Trademark Office (USPTO) database and search for your preferred business name or logo.
Once you’ve determined that the name is available to use, you can choose to register a state or federal trademark. Trademarking your LLC can prevent other businesses from using the same name or something too similar.
A registered agent, or Registered Agent Service, is legally required in every state. This term refers to an individual or company that agrees to accept legal documents on behalf of a company and pass them on to the person in charge of the LLC. These legal documents include official correspondence like state filing notices and legal summons.
Different states have varying official names for the paperwork filed to register an LLC. While most states refer to the documents as the Articles of Organization, others refer to it as the Certificate of Organization or Certificate of Formation. Regardless of the document’s official name, it’s used to establish the state’s recognition of your company and outline the details of its members.
Since filing requirements also vary by state, you want to check your Secretary of State’s website for detailed information. You can complete the information on the formation documents and file them online or by mail or hire an LLC formation service to file it for you.
Generally, you’ll need to provide basic information about the LLC and its members, including the company name and mailing address as well as the registered agent’s name and address. The state may also ask you to mention the purpose of the LLC and list current members or managers.
You’ll need to choose the location of operation, which should be where members work together. If you are operating the company from your private home, list your home address. If you aren’t receiving mail at the place of work, be sure to include a USPS-verified mailing address.
You may be asked about the LLC’s management structure. That means you’ll have to mention whether it’s member-managed or manager-managed. In a member-managed LLC, members handle the company’s day-to-day operations and decide who’s responsible for what. On the other hand, a manager-managed LLC is where members choose one or more supervisors to run the company and vote on critical issues such as changing strategic plans, purchasing real estate, or taking out loans.
Other basic details you need to provide include the date when the limited liability company (LLC) will begin doing business and its duration (if you’re planning to dissolve the company after a specific duration or if you intend to run it in perpetuity).
Once that’s complete, one or more LLC owners or organizers will need to sign the form. Then, you’re all set to submit it. Most states allow online or mail submissions. If you’re not sure about submitting the signed form and payment, you can find the details on your Secretary of State’s website.
States such as New York, Arizona, and Nebraska require you to publish a notice in the newspaper indicating your intention to register an LLC. If that’s the case in your state, you’ll need to do that before filing the Articles of Organization.
Although an operating agreement is not a legal requirement in every state, having one can come in handy. This legally binding agreement provides clear and concise details of the legal, financial, and management rights of all members of the limited liability company (LLC). It can include details of capital contributions, how members can leave the LLC, voting rights, how profits will be distributed, dissolution, and more. Simply put, it should contain all relevant information pertaining to the LLC’s operations.
Crafting an operating agreement is a smart business move, especially for LLCs with more than one member or partner, as it will ensure everyone agrees with their rights and responsibilities and minimizes future disagreements. But that doesn’t mean solo business owners wouldn’t benefit from a written operating agreement.
In the case of a single-member LLC, an Operating Arrangement will define the separation between the business owner and business, describe the business operations, clarify succession, and avoid default state law rules.
Other purposes of the LLC Operating Agreement include:
- How to handle the withdrawal of an LLC member
- Determine how records will be kept, who is responsible for them, and how each member can access them
- How to represent members in official meetings
- Assigning the individual(s) responsible for opening bank accounts on behalf of the company
There are plenty of free LLC online templates to guide you when crafting your own LLC operating agreement. However, you’ll want to consider hiring an experienced attorney for legal advice in complex situations such as an LLC with multiple owners.
In addition to an Operating Agreement, you may want to start a membership ledger right away. A membership ledger would be similar to tracking stocks of a corporation. But when you form an LLC, business investors are called “members” instead of “stockholders.”
It helps to maintain a list of members and their respective percentages of interest in the business. That way, you can avoid personal disagreements getting in the way of good business down the road. A membership ledger can save you a lot of time and money.
Membership ledgers typically include the exact date the members came on board, the number of assets they brought to the company (in cash, capital, or property), the length of time they intend to be members, and what their withdrawal will look like.
After the LLC’s formation documents are filed and approved, the state will issue a certificate or other document to confirm that your LLC formally exists. Once you’ve received the certificate, you can go ahead with other business matters like obtaining an EID number, business license, and setting up a business account.
Once you officially form an LLC, you should consider registering it with the federal government by applying for an Employer Identification Number (EIN) from the IRS. An EIN is the business equivalent of your personal Social Security number. If your LLC has more than one member, you’re required by law to obtain an EIN, even if you have no employees.
The IRS uses the EIN to identify your company for tax purposes. Banks will also require you to have an EIN before they can open a business account for you, and you’ll be unable to secure business credit without one.
Sole members of an LLC must obtain an EIN only if the LLC will have employees. Otherwise, owners of single-member LLCs must pay self-employment taxes on their earnings from the business. Alternatively, you can opt to have the company taxed as a corporation rather than a sole proprietorship. You may obtain an EIN by completing an online EIN application on the IRS website. The process is free, and when done online, the EIN is issued immediately.
In some cases (for example, if you have employees or sell products and collect sales tax), you’ll typically need to register with the appropriate state agencies.
Your LLC may need to obtain other local and state business licenses depending on the type of business and location. Check with the appropriate state agencies to confirm that you’re properly registered and licensed to conduct business in your state.
Moreover, most states require LLCs to file an annual report, which involves paying your annual fee or franchise tax and updating your registered agent address.
Unless you’re doing business in several states or you have a compelling reason otherwise, it’s generally best for you to set up your business in the state where you’ll principally be doing business. Doing business means you have specific types of business activity in that state. For example, you’re doing business in a state if:
- Your business has a physical presence or office in the state
- Any of your employees work in the state
- A significant portion of your company’s revenue comes from the state
- You often have in-person meetings with clients in the state
While you may get some tax and organizational advantages of registering in certain states, you want to research it further and consult with an attorney before making the decision.
More often than not, you’ll need to be generating a large amount of income to see the significant benefits of setting up your LLC in tax-friendly states such as Nevada, Delaware, and Wyoming. It’s wise to set up your LLC where you conduct business and then consider switching once your business starts to generate a lot of revenue.
If your LLC does business in more than one state, you may need to register to do business in other states. You can do that by filling out and submitting paperwork similar to the paperwork you filed when forming an LLC. You’ll also need a registered agent in each state where you’re authorized to do business.
This step is a crucial part of forming and maintaining a limited liability company (LLC). It involves filing and maintaining the proper records and compliances involved with operating your business entity. Because most of the compliance is business-specific, below are some general guidelines to understand.
If you’re required to have any licenses for operating your business, be sure to get them before your first sale. Common business activities that require business licenses include:
- Mining and drilling
- Fish and wildlife
- Alcoholic beverages
- Radio/TV broadcasting
- Transport and logistics
The licensing requirements can change depending on the city in which you’re operating. That’s why it’s crucial to check state, county, and city regulations to see what licenses you might need. The last thing you want is to incur costly charges or have your business entity shut down for license violations.
Some states require a minimum amount of bond held in your company’s name. The bond acts like insurance held by an independent third party in case of a lawsuit or malpractice. If you’re in an industry that requires bonding, you’ll likely know about it during your licensing procedure. If you’re not sure, check with your local authorities.
Make sure all your financial records are up to date from day one. Maintaining accurate financial records will save you a lot of headaches in the long run. You will be responsible for all finances, so be sure to keep track of every dime. When the IRS comes calling, you’ll want to have all your taxable revenues and expenditures accurately recorded and on file.
Don’t forget to check with your city, county, and state authorities on the paperwork you’re required to file every year. Some cities require that you update your license annually, while some states require that you file an annual report.
Most states require businesses with employees to get workers’ compensation insurance. General liability isn’t typically a legal requirement, but it can come in handy. General liability insurance coverage protects your business assets from lawsuits. Without such cover, a legal claim could force your LLC out of business.
Once you decide to hire employees for your company, you must follow these legal compliance requirements:
- Verify that new employees have US work authorization
- Print compliance posters and place them in visible areas of your workspace
- Withhold employee taxes
- Pay employees at least minimum wage and as often as your state requires (weekly, bi-weekly, etc.)
- Report employees as “new hires” to the state
Using a dedicated business bank account and credit account is crucial to protecting your company’s corporate veil. When you mix your business and personal accounts, your personal assets (your home, car, and other valuables) are at risk in the event your LLC gets sued.
Making sure you comply with all industry regulations and statutes is crucial to operating a successful LLC. If you fail to comply with agencies that have jurisdiction in your industry, you’ll likely have a difficult time rebuilding your reputation.
How to Form an LLC by State
Now that you know how to form an LLC, here are a few tips to get started.
Start by finding a quality bank with a good business bank account. Don’t just settle for the first bank you find–shop around. The same goes for funding. Securing credit with an LLC is typically easier than finding personal credit, so you can spare some time to compare your options.
Don’t take the first line of credit offered to you. Compare interest rates and pay attention to the terms. You may be tempted to jump on the first offer you get, but it never hurts to do some research.
The local chamber of commerce can be a great place to meet like-minded individuals, find answers to common questions, and learn more about compliance in your area. A local chamber of commerce can help you select a business bank account, renew your licenses faster, and navigate city ordinances.
An LLC is a great business structure that works well for many small business owners. In most states, setting up and maintaining an LLC is relatively easy and has many benefits.
However, it’s crucial to fill out the paperwork and have an operating agreement that defines the member’s rights and responsibilities. Now that you know how to form an LLC, you should have an easy time setting up your business entity for success. Are you looking for professional business formation services to save you money?
You’ve come to the right place. At Go Virtu, we specialize in helping small- and medium-sized enterprises with business formation services.