A limited liability corporation (LLC) is a famous structure for startups. LLCs are established in accordance with state law. This gives owners little liability protection. LLCs can provide “pass-through” tax treatment to avoid the double tax rate found with C-corporations. Except for voluntary contrary elections, LLC owners are not taxed.
While the exact requirements for setting up an LLC differ from one state to another, the general rules are pretty similar. While you don’t necessarily need legal counsel to form an LLC, it is unnecessary to do so. However, it can be beneficial to have multiple owners of the LLC or investors outside.
Many online services will assist you in preparing the paperwork and filing the required documents for a minimal fee. CorporationNet.com, MyCorporation.com, and LegalZoom.com all have thousands of LLCs.
Ten key steps to form an LLC
1.The State Where the LLC is to be Organized A LLC is created according to the state’s laws in which it is located. However, in most cases, you need to create an LLC in the same condition as the business since this will help save you fees and complexity.
If your LLC intends to operate in multiple states, it may be necessary to register in each of those states. This typically involves filing a notice with each Secretary and paying the filing fees.
2.Name the LLC
Next is to select a suitable business name for your LLC. There are several things you should consider when choosing an LLC name.
- The name should usually include “LLC” or “Limited Liability Company,” as well as any other permitted abbreviation.
- Some terms, such as “bank,” trustee, or “insurance company,” are not allowed in the name.
- Names cannot contain corporation, inc. or incorporated (to avoid mistaking the LLC for a corporation).
- To ensure you’re not violating another party’s trademark, you need to perform a trademark search (check out uspto.gov).
- Do a thorough Internet Search on the proposed name to determine if any other companies may be using it.
- You don’t want to choose a name it could limit your growth (e.g., “San Francisco Tires, LLC”)
- You should check if you can get the “.com” domain name associated with your business (as opposed “.org,” or “.net” or any other variant).
- If you plan to utilize a name other than that your LLC name publicly, you will need to file either a “fictitious Business Name” statement (DBA) or a “doing business in the same manner” (DBA).
Picking the right name is hard work. If another party owns it, you will have to pay a substantial amount.
3. File the LLC Articles of Organization
You can officially form an LLC by filing the “Articles of Organization,” which some states call.
- Articles of Organization are often short and easy to complete.
- A “registered agent” is who has been authorized to receive legal documents, such as complaints, service, subpoenas, and so forth. This can be either a service provider (such as CorpNet.com/MyCorporation.com) or an LLC member.
- There will be a filing fee of around $100 and, in some cases, an annual minimum tax (e.g., $800 in California).
- An explanation of the LLC’s purpose must be included. California has the language automatically set forth on the form. “The limited liability company’s purpose is to engage any lawful act or activities for which a limited company may be organized under California Revised Limited Liability Company Act.”
- California and other states require that you check a box to indicate whether your LLC will be managed either by one manager, more than one manager, or all members.
Sample Articles of Organization will be available on the website for Secretary of State in Word and PDF formats. You can see examples of Articles of Organization from California, Delaware, New York, and others.
4.Prepare the LLC Operating Agreement
The LLC Operating Agreement defines the owners’ financial, management, and other rights. The LLC Operating Agreement should address these critical issues:
- Which parties make capital contributions to the LLC, and when are they required to be made?
- There may be sanctions or remedies for capital contributions not paid.
- How profits and loss are to be divided among the owners
- The LLC may have any members or classes of securities that are preferred in distributions and liquidation. This is similar to “preferred stock” within a corporation.
- Who will manage the LLC (a single manager, a team of managers, or all members)?
- How many officers will you be able to appoint?
- Voting rights insignificant events such as the addition of capital or sale
- Protection for managers of the business through indemnification
- Restrictions on the transfer LLC interests (often referred to by “units”)
- Meeting Procedures
- Procedures for dissolution
Many lawyers and online filing service providers offer a standard form to create an LLC Operating Agreement to adapt to your specific situation.
5. Analyze the Issues in Raising Money from Investors
Raise money for your LLC from angel investors or family members, venture capital companies, or other investors.
- Venture capital firms are a popular choice for investors. They prefer to invest with corporations and not LLCs.
- Investors may be subject to the application of state and federal securities laws. It is essential to seek legal advice for a “private placement exemption” to be appropriately used.
- Investors must be aware of the risk of investing and should make representations or warranties that they are skilled investors, “accredited,” understand the risks, and are prepared to lose all of their investment.
- The rights of investors include voting rights, rights to profits, tax benefits, and voting rights. An investor rights agreement and the LLC’s Articles of Organization must clearly state the investors’ rights.
6.Get an Employer Identification Number.
The IRS will issue an Employer Identification Number (EIN). This is necessary if there are any employees you intend to have in the LLC. Also known as a Federal Tax Identification Number, the EIN can be referred to as “Federal Tax Identification No.”
An IRS Form SS-4 was required to obtain an EIN. This took several weeks and could be costly. Online registration allows you to get an EIN instantly.
Before you open a bank account for a business, most banks will require you to have an EIN.
7.Get the required business licenses.
Your business’s nature will determine whether you need a state, local, or federal license. A national, state, or business license is required if your business sells alcohol and firearms. For companies that conduct business in certain cities like San Francisco, they will need a business license. Other cities like Chicago require special permits for industries such as retail, restaurants, and entertainment venues.
8.Create an LLC Bank account
It is essential to capitalize on your LLC appropriately and have sufficient funds to allow it to continue operating. Additionally, you need to make sure your accounts are separate from the LLC account. This will require that you open a bank/checking accounts in the LLC’s name. You can expect that the bank will request your filed Articles of Organization, EIN, resolutions of LLC authorizing the account opening, as well as any other documentation. You will need two signatures for extensive checks above a specific amount.
9.Keep an LLC Membership Logger
An LLC Membership Ledger can be compared to a stock ledger of a company. It contains the names and addresses (members) of all LLC owners and the type of units, and how many they own. The Membership Ledger also records dates and transfers of units. It is vital to keep the LLC Membership Ledger updated.
10.Keep current with required filings.
Late filings may result in penalties and fees.
You should file all required filings in the new jurisdictions when you open a business in another state.
You must amend your LLC filings in the event of any changes to your business address or business name.