An LLC, or limited liability company, is a type of business entity that combines elements of both a sole proprietorship and a corporation. Classifying a business as an LLC can offer the owner legal protections afforded to corporations while retaining ownership.
Once you've decided that an LLC is the right structure for your venture, the steps outlined below will help you get your business set up correctly and ready to welcome customers.
Step 1: Decide where to register your LLC
When selecting a registration location, the best option is typically the simplest: file in the state where the LLC's physical headquarters are located.
Although certain states offer more attractive benefits for hosting a business, filing out of state necessitates additional paperwork and fees. These extras will also apply to an LLC for each state that contains additional physical stores or locations.
Further, business owners must obtain a state-issued license to conduct business through their LLC. Each state has individual laws that govern LLC operation and creation. These laws are presented in that state's articles of organization (explained in further detail below).
Step 2: Choose a name
Although naming an LLC may feel out of sequence as the second task on this list, its name must comply with the guidelines specific to the chosen state of operations. Rules differ by governing bodies, but all states share several requirements. The name of an LLC must be:
- Unique: The name cannot be shared by any other business or LLC registered within the state. Even if only one letter needs to be altered to comply, it is best for the success of a business to use a unique name that resonates with customers. They should not confuse your services with those of other entities or competitors.
- Clear: The identifying phrase "limited liability company" or certain abbreviations depending on the state, such as "LLC," "Ltd.," or "Co.," must be included in the filing name.
- Honest: Misleading words implying a connection between the LLC and a government body or corporation are prohibited.
Most states allow applicants to reserve a name for an LLC that they are not yet ready to file (for a fee). This can be particularly helpful when coordinating available LLC names with potential matching website domains.
Step 3: File your articles of organization
Each state has a unique set of rules guiding LLC creation known as its articles of organization (also referred to by some states as a certificate of formation or a certificate of organization).
Prospective LLCs must pay a fee and complete an application according to that state's articles. Although there are differences between states, nearly all articles request the following information about the LLC:
- The legal name and mission statement.
- The business's mailing address.
- The expected life cycle (if the LLC will not be permanent).
- A summary of company ownership and management structure.
Entrepreneurs looking to create an LLC should strongly consider recruiting the help of outside experts, like attorneys or accountants who specialize in LLC operations.
Step 4: Get a registered agent
Many states also require the name and address of an additional registered agent who is needed to sign for the LLC. Registered agents are individuals or businesses that manage legal documents for the LLC.
They serve as the legal intermediary between the state and the company. A registered agent's physical address must be within the state for which the LLC is registered. The agent can be a member of the LLC or hired from a list of private service companies made available by the state.
Step 5: Write an operating agreement
An LLC's operating agreement dictates its core processes and management systems. Although state regulations do not mandate an operating agreement, it is imperative for an LLC and any other business to outline its organization and structure in a legally binding document.
The most important item defined by an operating agreement is the management structure. Is the LLC controlled by its members or an external board of directors? Other important principles include meeting schedules and voting structures among governors, financial investment practices, income classifications, and dissolution terms.
Step 6: Meet regulatory requirements
Once the state has received an application and approved the LLC, owners can take the final steps to legitimacy. The most important of these is the IRS employee identification number, which allows the LLC to conduct business with banks and hire employees.
Other regulatory requirements may apply depending on your business sector. For instance, bars and restaurants need specific business licenses. State sales and employer taxes can vary by state and industry.
Step 7: Consider hiring outside expertise
Navigating LLC laws, selecting a registered agent, and crafting a cohesive operating agreement can be daunting. This process demands financial and legal expertise that most individuals might struggle to match. Entrepreneurs looking to create an LLC should strongly consider recruiting the help of outside experts, like attorneys or accountants who specialize in LLC operations.
The investment in experts is often better than the cost of recovering from financial or legal missteps when starting an LLC. Their experience working with other successful LLCs can help you build the road map for expanding your own company.
Why register an LLC?
An LLC offers certain advantages compared to other business structures. An LLC separates your business assets from your personal ones, which can make your venture seem more credible to clients and competitors. It also protects your personal assets against lawsuits, debt, and other business obligations.
From a tax perspective, LLCs have a bigger tax burden. LLCs pay federal, state, and local taxes; some states require LLCs to pay state business tax and unemployment taxes too. The IRS gives LLCs some flexibility on how they are taxed, so it's worthwhile seeking advice as you start up. The right tax professional can give you guidance on how to find deductions specific to your LLC and make sure you comply with all your tax obligations.
This article was originally written by Jordan Beir.
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