What is an LLC?
Forming a limited liability company (LLC) offers excellent liability protection for a relatively low startup cost. LLCs protect owners by forming a clear and legal separation between each member and the business entity itself. Such protection can protect members’ personal assets should your business face legal trouble in the future.
How to set up an LLC
Because LLCs are business structures that are allowed by state statute, the steps to forming an LLC vary depending on the state in which you register your LLC. However, there are a handful of general steps every LLC must take.
1. Select an available business name
Have the perfect name for your business in mind? While it’s important to come up with a marketable name that is reflective of your brand, your new business name will also need to fall in line with several state and federal requirements.
State requirements
Any new business seeking LLC registration must come up with a unique business name that is not currently in use. In this regard, getting your business name registered with the state you choose will likely come on a first-come, first-serve basis, which is why you need to perform a name search in the state of your choosing well before you start ordering business cards and t-shirts. This database is typically found on your secretary of state’s website and is called a “business entity search” or “business name availability check” database.
The secretary of state website often offers other resources to help you choose a unique and acceptable name. These include prohibited-word lists and guidance on how a company can legally distinguish its name from other business names.
Federal requirements
In addition to ensuring your name is available with your state, it’s important to verify it’s not nationally protected against infringement. You can do so by searching the U.S. patent and trademark office’s trademark database. If your chosen name is in the database, it’s not available for use.
Marketability
Finally, search your business name’s domain and social media handles to ensure its digital forms are available.
Once you’ve confirmed your name can be legally used and is marketable, consider reserving it with your state to ensure it remains so until you officially form your business. You can often complete the reservation process through your secretary of state website using a name reservation form. For example, in Arkansas, this form is called an application for reservation of an LLC name (LLC-05). A reservation fee of between $10 and $50 usually applies.
2. Choose a registered agent
Regardless of the state in which you file, your LLC must designate a registered agent to receive legal and other important paperwork on your LLC’s behalf. Registered agents are individuals or companies that live or operate in the state where your LLC operates. They must be available at the listed registered agent address (such as a business office) during all regular business hours throughout the year to fulfill their duties.
Registered agents must be 18 or older and live in the state. You can elect an LLC member or manager or designate yourself as the registered agent (if you live in the state where the LLC is formed). If you’re forming an LLC out of state or cannot perform the duties internally, you may also consider hiring a company that provides registered agent services.
Is it smart to be my own registered agent?
Each state allows business owners to be their own registered agents; however, a few tradeoffs involved with self-representation may not be convenient or doable. Here are some considerations when deciding whether or not to serve as your own registered agent:
- Privacy: Registered agents must provide their names and addresses at filing, and such information becomes public record and available for anyone to search and find. This can be especially inconvenient for home-based businesses or businesses without a physical address.
- Reputation: Serving as your registered agent could expose your business to embarrassment as legal paperwork (such as notices you are being sued) are delivered to your office in front of clients or employees.
- Loss of flexibility:You must be available at the listed registered agent address during all business hours throughout the year. You may not leave, for example, to meet with a client or for paid time off.
If you’re forming a single-member LLC and it’s only you at the helm, it may be a good idea to speak to an attorney before deciding whether acting as your registered agent is in your best interest.
Designating a registered agent
The pathway to designating your registered agent depends on who you register. For example, if you plan to serve as your business’s registered agent, make sure you have a physical address prepared where you will be present during regular business hours to receive key documents. P.O. boxes are not acceptable. Then, record your name and registered agent address on your LLC’s formation paperwork (see step 4) as prompted.
If, however, you choose to appoint a third party as your registered agent, you must find an entity that is available to serve your business during all regular business hours during the year and has a physical address within your state. Expect to pay between $0 and $300 to hire a registered agent service. Once you’ve hired one, provide their information and a representative’s signature on your LLC formation papers.
3. Complete your state’s LLC articles of organization form
Articles of organization (also known as a certificate of formation in some states) are required to set your business up as a registered legal entity with the state. Typically, each state provides its own form available for download or completion online on the secretary of state’s website.
Though information-provision requirements vary by state, the following information will likely be requested as you fill out this form:
- Your LLC’s name.
- Your name, address, phone number and email.
- Your registered agent’s name, address, phone number and email.
- The name of your LLC’s organizor (i.e., you) and a member of your LLC (if a multi-member LLC).
- The submitter’s name, contact information and signature.
- The date you wish your LLC to form.
- Your LLC’s purpose.
- The duration of your LLC (i.e., “perpetual”).
You will also be required to submit a filing fee. Depending on your state’s requirements, this filing fee ranges from $40 to $500. You must be prepared to either submit a check (by mail) or credit or debit card information (online) to cover this fee.
4. Submit your LLC articles of organization form
Each state has different requirements for submitting articles of organization. An LLC filing service can help you satisfy the specific requirement of the state in which you form your LLC.
For example, here are some state submission requirements:
- Georgia:To file your articles of organization in Georgia, you must fill out the form online via Georgia’s secretary of state website. First, create an account, then sign in and click “create or register a business” and “domestic limited liability company.” Fill out the form along with your credit card information and follow the prompts to submit the form.
- Delaware: Print or fill out Delaware’s certificate of formation of a limited liability company. Mail the completed form; a cover letter with your name, address and phone number; and your check (payable to Delaware Secretary of state) to the Delaware division of corporations.
- Maryland:Create an account with Maryland’s online business express system. File your form through this portal and include credit or debit card information to cover the $100 filing fee and a 3% credit or debit card processing fee.
Determine the requirements for submitting your articles of organization in your state. This information is often available in the form’s instructions or on the screen where you access the form online.
5. Create an operating agreement
Not every state requires an operating agreement when forming an LLC, but it’s still a crucial part of LLC formation — especially if you’re forming a new business with multiple members.
The operating agreement covers the legal, managerial and financial responsibilities of each member of your LLC. It sets clear expectations from the beginning that every member should adhere to during the LLC’s operations. In doing so, it offers the following benefits:
- Protection against state rules: Most states have default rules regarding how an LLC should operate. These rules may contradict your LLC’s needs and your members’ wishes. As a legally-binding document, an operating agreement allows your LLC to override those rules and set its own.
- Dispute prevention and resolution: By setting clear expectations regarding how your LLC will operate, members’ rights and responsibilities, percentages of ownership and more, you create a clear operational foundation that mitigates the risk of confusion and disputes among members down the line. And, if your members should disagree, an operating agreement offers clarity or guidelines for resolving the dispute.
- Confirmed separation of personal and business assets: Your operating agreement confirms your entity’s LLC structure and each member’s ownership percentages. In doing so, it can prevent members from being personally liable for business or other members’ liabilities should the LLC be sued.
A solid operating agreement outlines the following key concepts:
- How profits will be distributed.
- Each member’s ownership percentages.
- Each member’s initial contribution to the LLC.
- How members can leave the LLC if desired or needed.
- How the LLC can be dissolved.
- The LLC’s accounting methods.
- Members’ voting rights and responsibilities.
- How and when meetings will be held.
- The procedure for one member buying out the ownership percentage of another.
You can draft your agreement using a free operating agreement template such as those provided by most LLC filing services. However, since this is a legally-binding document, before all members sign the agreement, we strongly encourage you to consult a business attorney to ensure the document meets your LLC’s unique needs. Many LLC formation services provide access to legal consultation.
6. Keep your LLC active
One of the most attractive benefits of forming an LLC is the low cost of keeping the business active with the state. Filing an annual report serves this purpose. However, if you forget to report to the state that your business is still active and in good standing, it could cost you a lot of money and will likely result in the forced administrative dissolution of your LLC.
Most states require you to file an annual report on time, and you may also need to pay an annual fee. In Florida, for example, missing the May 1st filing deadline will result in a $400 late filing fee just to keep your LLC active.
Check your state’s annual filing and fee requirements, typically found on your secretary of state’s website. In addition, mark your calendar at least one month before the filing deadline to help avoid unnecessary late fees. Some states will also send a reminder to your registered agent before the yearly filing deadline. Look for such notices.
Next steps to finish creating your LLC
1. Obtain an EIN
An employer identification number (EIN), also known as a federal tax identification number, helps to keep the money and assets tied to your new LLC legally separated from your personal finances. It is also used for tax administration purposes. While an EIN isn’t always necessary depending on your business size, structure and industry, it’s a safer alternative to using your social security number, which should be reserved for personal use.
2. Get proper business licenses
Depending on the industry in which your LLC operates, you may need to obtain a business license from your state and pay licensing fees. Check with your state to learn your business licensing requirements, fees and deadlines.
Many states offer a website page dedicated to providing such information. Example names of such website pages include the division of licensing or division of commerce and consumer affairs website.
Remember that you must periodically renew your business license(s), usually annually or biannually. Avoid letting your business license lapse by taking special note of periodic deadlines and setting calendar reminders well in advance. Failing to renew required licenses could jeopardize your LLC’s legal status.
Pro tip: Some registered agent service providers offer digital calendars with deadline alerts for important filing dates, such as your annual report filing deadlines and business license renewal deadlines. Check with your registered agent to see if this feature is available and to learn how you can access it.
3. Keep personal and LLC assets separate
Taking mindful steps toward separating business assets and finances from your personal accounts is crucial to forming an LLC that offers proper limited liability protection. Obtaining an EIN is an excellent first step toward legal separation. A smart (and relatively easy) second step is to open up a business bank account to manage your business funds and expenses.
Many banks require you to have an EIN before creating your new account. Once your business bank account is established, you can withdraw members’ (or your) payments based on the payment structure outlined in your operating agreement. You can also pay business expenses from this account, such as estimated taxes.
Pro tip: Avoid making payments directly from your business account for personal reasons, thus mixing or commingling funds that are required to be kept legally separated.
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