An LLC is one of the most popular structure options people consider when starting a business these days. This is because it gives the proprietor several advantages of a limited partnership and a corporation. An LLC also comes with more privileges compared to a sole proprietorship. For starters, owners get the freedom to choose how they are taxed, with most people preferring to be taxed as an individual. At the same time, an LLC means that you and your business are two completely separate entities, thus protecting your personal assets from liability in case of unmanageable business debts or other legal obligations.
The best part is that starting an LLC is fairly easy, plus it offers higher managerial flexibility compared to a corporation. The requirements and regulatory procedures may vary from one state to another, but the formalities are not complex, and the paperwork is usually minimal. It usually starts with selecting a unique business name, filing the required paperwork, and registering the business. As a matter of fact, it might take just a few hours to set up an LLC and make it a legal entity if you know the steps to follow.
Let’s take a look at the following six steps you need to make your LLC set up a breeze.
1. Pick A Unique Business Name
For the sake of branding and marketing, choosing the right business name is a crucial aspect when launching. However, the business name you pick is also required to meet the state’s requirements.
Basically, the law requires you to pick a unique business name that is not already in use by another business entity in your state. Benjamin Aronson’s article from the FinancePond provides some tips about the best states to form an LLC. The article also sheds some light on domestic and foreign LLCs, which basically refers to LLCs formed in your home state or out of state.
In some states, also, using certain words that may falsely imply that the business is in a certain industry (like banking or insurance) is prohibited. At the end of the business name, you will need to add the acronym LLC to indicate that it is a limited liability company. As you review the LLC naming requirements in your state, don’t forget to conduct research and find out with the responsible business filing agency if the name you want to use is available.
2. Pick A Registered Agent
Next, you will want to choose a registered agent, who is basically your business representative involved in receiving and sending paperwork for your business. They will be in charge of any document you will need to file with the state, legal action paperwork such as subpoenas, and much more. A registered agent is basically a state requirement when forming an LLC. You could also be your own registered agent when forming a domestic LLC, or the registered agent you choose should be a resident of the state where the LLC is being created.
3. Preparing The LLC Articles Of Organization
Sometimes called the certificate of formation, The Articles of Organization document must be filed with the respective state agency for an LLC to become a legal business entity. Many states have a standardized form that can be downloaded online from the respective agency’s website. Once you download the form, you will need to fill in several details while adhering to the state-specific requirements listed on it or provided on the official website. Some of the details you will be required to fill in include the following:
- Business name
- Business purpose
- Principle business physical address
- LLC management plan
- Registered agent contacts
- Prospected LLC duration
- Business owner signature
4. Filing The AOU
Once you have prepared the Articles of Organization (AOU) and supplied the required information, you will need to submit the document to the responsible state agency for business filings. This is referred to as filing the articles of organization or certificate of formation. Be sure to find out how much you need for the filing fees in your state, or else your business will not be registered. Upon approval, the state issues you with a certificate indicating that your LLC is now a registered business. You will basically need this document when opening a business account at the bank and other crucial tasks such as obtaining a Tax ID.
5. Formulate The Operating Agreement
When an LLC is started, there is either a single owner or multiple members. To avoid future wrangles or conflicts down, an operating agreement is necessary for the latter. The document contains detailed information and articles on how the multiple-member LLC will be run and managed. Some examples of the particulars covered in an operating agreement include the following:
- Administrative roles and rights of members
- Financial rights of members (like financial input and profit distribution)
- Legal rights and obligations of members (like how a member should leave the business)
While an operating agreement may not be a state requirement in your location, it is necessary if the business will have more than one owner. It is also helpful in some instances if you run the LLC solo. You can DIY or use free online templates, but complex LLC formations will often need a business attorney to help craft the operating agreement.
6. Understand Tax And Regulatory Compliance Requirements
When starting an LLC, you may also need to comply with certain regulatory and tax requirements beforehand. Some of them are additional and may not apply to all LLC formations, so it is necessary to find out if you need them. They may include:
- Employer and Sales Tax: If you will have several employees in your LLC, it means that they should pay income tax. If the company is in retail, there’s a high chance you will collect sales tax as well. In this case, you need to learn about LLC tax registration and the rules involved. The last thing you want is for your company to get into loggerheads with the taxman at takeoff.
- Employer Identification Number: EINs are used for a wide range of purposes, including taxation, insurance, and lending. LLCs with more than one owner should have an IRS EIN, which can be applied online. The same should apply if an LLC has employees or plans on hiring employees at some point.
- Business Licensing: On top of the registration certificate, an LLC might need certain business licenses and permits from local and state governments. The licenses you need will largely depend on the type of your business and its primary location.
As you can see, setting up an LLC is not a complicated process if you know what you need to do. The few steps above could get you up and running if you are yet to do so, perhaps because you don’t have registration documents. Keep your LLC active and ensure the business maintains a good track record with the state by paying the required fees on time and filing your annual reports.