Creating an LLC (Limited Liability Company) can give many business owners the upper hand in avoiding liability, management flexibility, and tax leverage, among a mountain of other benefits. While the notion of hitting the ground running with your business idea is cause for excitement, you’ll want to briefly pull in the reins and follow a series of steps that’ll set your LLC on a course for success.
Creating an LLC 101:
What is an LLC?
An LLC (Limited Liability Company) is a type of business formation in the United States with special regulations which include shielding members from certain liabilities, an attribute that isn’t available to partnerships or sole proprietorships. Moreover, LLCs are relatively simple to manage, and, unlike certain corporations, taxes pass through the business directly to members, which avoids instances of double taxation.
Benefits of Creating an LLC
- Limited liability. LLC members don’t have to worry about their personal funds being at risk if the business incurs debt or is forced into bankruptcy.
- Management flexibility. Corporations must be managed by a board of directors, but in an LLC, members can wield management powers or elect others to do so.
- Pass-through taxation. Taxation with LLCs is akin to partnerships and sole proprietorships in that profits and losses pass through the business directly to members, who then report earnings or losses on their personal tax returns.
- Membership flexibility. Membership is not capped at a certain number, and there are no restrictions limiting who can be a member of the LLC.
Disadvantages of LLCs
- Cost. Smaller businesses may feel the cost burden of an LLC. However, it depends on the state in which your LLC is located. Costs differ from state to state, but annual fees can range from under $100 to thousands.
- Recording. Personal business must be kept separate from the LLC, which includes bank accounts, meeting minutes, and other records.
6 Steps to Creating an LLC
1. Choose the State in Which You Base Your LLC
While you can virtually headquarter your LLC in any state, you’ll likely want to choose to base your LLC in the state in which you will be doing all or most business. This is because, depending on the state, you may have to register as a foreign LLC. This may create additional fees and taxes. However, some strategically choose to base their LLC in certain states and end up saving money.
2. Choose a Business Name
Choosing a name is one of the highlights of starting a business, but it’s not as simple as writing one down and moving forward with logos. First, perform an LLC name search on your state’s database to see if the name you chose is already in use by another qualifying business. If you think of a name very early on in your formation, pay a small fee to reserve the name if it is not already taken.
3. Select a Registered Agent
Your LLC may be operated by a single person or a collection of members, but whether it’s the founding member or another person, one individual should be selected to be a registered agent. A registered agent is someone that is the point of contact for important legal documents, whether it’s tax information, lawsuit notices, or other types of government correspondence. The registered agent does not have to be a member of the LLC, and can instead be a business entity that provides registered agent services. It’s crucial to have a reliable registered agent, as missing government deadlines and notices can put the entire LLC at risk.
4. File Articles of Organization
The next step is to file the articles of organization within your state. Articles of organization are short documents that collect baseline information about the LLC. They also establish it as an active business entity, and most states have pre-made templates to fill in. A few states use the term “certificate of formation,” while others use “certificate of organization.” The articles of organization will usually include:
- Business name
- Business address
- Names and addresses of managers and main members
- Name and address of the registered agent
- A statement about the purpose of the business
5. Write LLC Operating Agreement
Your LLC operating agreement is one of the most instrumental documents in your business. Besides documenting specifics that you’ve already decided, like your business name and a registered agent, it’s in the operating agreement where members will make legally-binding agreements surrounding profit allocations, disbursements, distributions, responsibilities, and much more.
If you’re a single-member LLC, you still need an operating agreement for legal purposes. If you’re a multi-member LLC, it’s even more important to draft a head-to-toe operating agreement. Many states don’t require paper-and-ink operating agreements. However, the undisputed recommendation is this: create one, even if it’s not required.
Some things you’ll outline in an operating agreement are:
- Division of ownership;
- Member authorities, labor, and responsibilities;
- Voting clauses;
- Transfer of interest rules;
- New member rules;
- Profit and loss distributions; and
- Anything else pertaining to the LLC’s operations.
6. Apply for an EIN, Business Licenses, and a TIN
Next, head to the IRS’s website to apply for an Employer Identification Number — even if you have no employees. The LLC’s EIN allows the IRS to keep track of a business’s tax returns and is required.
You may also have to apply for special business licenses at the county or city level. Check your county or city’s requirements on appropriate licenses or permits for your business.
Finally, if you’re selling any type of good that requires you to collect taxes or if you have employees, you’ll need to register for a TIN, or Tax Identification Number. Find your state in Nolo’s 50-state tax guide.