How do you form an LLC?
The majority of the 5.5 million small enterprises established in the United States in 2023 were limited liability companies (LLCs). Experts predict further growth this year, helped along in no little part by the relative ease with which one may form and register an LLC.
There are only seven easy steps (plus a few other things to remember) to form an LLC, in contrast to the lengthy and complicated procedure of decades before.
A lot of people who run small businesses choose to form limited liability companies (LLCs) because they provide better tax and management options, reduced initial expenses, and protection from personal accountability.
Among these advantages, the ease and speed with which an individual can form an LLC stands out. The typical time it takes to file for an LLC online is an afternoon, and depending on the state, the approval process can be as short as a couple of work days.
Even though it’s not hard to create an LLC, there are seven steps you must follow according to the law. Following these steps will help your new firm get off the ground without any problems.
- Identify your company’s name
The majority of the time, a potential customer’s initial interaction with your business will be its name—the first opportunity to capture their interest. You may differentiate yourself from the competition, lay the groundwork for future branding initiatives, and position your organization for success with a distinctive, expressive name.
However, the name of your limited liability corporation (LLC) must adhere to certain legal guidelines, the specifics of which differ from one state to another and from one type of business to another. We advise you to check the regulations of the state where you intend to do business, but generally speaking, the name of your company must:
Stand out from the competition. All states have a policy that says a company’s name ought to be different enough from other names in the jurisdiction to avoid consumer confusion and safeguard businesses’ reputations. Think about doing a search for similar names on the website of your state’s secretary of state for businesses.
Add a business-type indicator. Official company names in every state must contain some indication of the company’s structure, albeit the exact list of permitted acronyms differs from one state to the next. Typically appended to your business name, these designations can read “limited liability company,” “LLC,” or something similar.
Stay away from prohibited words. Companies can’t usually include words like “bank” or “insurance” in their names unless they get special permission to do so. Businesses in this situation should be aware that the approval procedure might be time-consuming.
Pay heed to previously registered trademarks. Companies often use trademarks to safeguard their brand and intellectual property; as a result, trademark infringement litigation is serious business. You should check that no current businesses might sue you for using a similar name before settling on a name for your company.
Even if you aren’t quite ready to form a limited liability company just yet, you can reserve a name in most states. To secure a name, all you have to do is fill out the appropriate paperwork and send it in with the filing fee for your state.
- Choose a registered agent
On behalf of your limited liability company (LLC), the registered agent (also called a resident agent or statutory agent) must receive and forward any legal papers (such as subpoenas and lawsuits) to the correct party inside your company as soon as possible.
An individual or business authorized to offer registered agent services in a given state, or an adult resident of that state with a physical presence within the state (sometimes called the “registered office”), are the usual qualifications for serving as a registered agent, though these requirements vary from state to state.
The role of registered agent can be filled in one of three ways in the majority of states: by the business owner, an employee, or a third party agency. You might need to go with this last choice if:
- Your company doesn’t have an actual office in the state where it was founded.
- Throughout the day, no one is at your place of business.
- You like to keep your home address out of public records as you operate a business from the comfort of your own residence.
- Select a management structure for your limited liability company
You must ascertain the form of your new business before proceeding to draft an operating agreement for an LLC. In most cases, you’ll have to decide between two basic structures:
- Member-managed LLCs: In a member-managed limited liability company (LLC), each owner or member has an active role in running the company and making decisions. While this may be an option for larger companies, it is more typical for smaller LLCs whose owners choose a more hands-on approach to running the day-to-day operations of the company.
- Manager-managed LLCs: The owners of a manager-managed limited liability company (LLC) appoint one or more individuals to act as managers and make operational decisions on a daily basis. It is important to note that the selected managers are not necessarily members or owners of the LLC. When there is a lack of interest from some members in being actively involved or when the LLC is rather large, a manager-managed structure is usually the best option.
Although there are only two choices available to you when deciding on the form of your limited liability company (LLC), you should nevertheless give this decision your full attention. Picking the correct option for your limited liability company may simplify day-to-day operations, define roles and duties in the workplace and in the legal sense, and boost your company’s prospects for success.
- Legally form a limited liability company (LLC)
A limited liability company (LLC) must have a documented operating agreement among its most crucial papers. Included in it will be the operating and financial standards for your limited liability company (LLC), as well as information on the structure of your firm, your ownership interests, and the distribution of earnings.
No matter where you live, it’s still a good idea to create an operating agreement that spells out everything that each member may anticipate from the LLC in the future. Doing so allows you to:
- Ensure that members do not get into any arguments
- Give them more safety from legal action
- Ensure the seamless operation of your limited liability company
- Protect individual wealth
When dealing with multi-member LLCs, it is usually advisable to engage an experienced business attorney, while owners of a single-member LLC can certainly set up their own operating agreement. This could increase the initial investment for your limited liability company (LLC) by a small amount, but it will save you hassle, money, and time in the long term.
- Submit your company’s articles for filing
Paperwork, everyone’s favorite part of forming a business, comes after settling on a name, registration agent, and detailed operating agreement. Articles of organization, articles of incorporation, certificates of information, or statements of information are all terms that describe the same set of documents that you’ll need to file in order to incorporate your limited liability company.
The following information is included in an LLC’s articles of organization, regardless of the name given to it in your state:
- Name of the limited liability company
- Where the LLC’s principal office is located
- The LLC’s term and objectives
- Whether the members of the LLC run it or a manager
- The registered agent’s name for the LLC
- Where the agent’s registered office is located
- At least one founder’s signature on the LLC’s paperwork
Most company owners nowadays use an internet tool to help them incorporate an LLC quickly and easily, and they double-check all of the paperwork to make sure it’s accurate. There will be less room for error, more clarity, and more time to devote to the other critical aspects of getting a firm off the ground if you do this.
In most states, you may submit the articles of incorporation for your limited liability company online, whether you want to do it yourself or hire a professional. State filing fees often fall between $50 and $200.
The processing time for articles of formation for an LLC can vary from instantaneous in certain states to many days or weeks in others (with some even charging more for faster processing). Upon completion and approval of your limited liability corporation papers, the state will provide a certificate of formation attesting to the formal existence of your business. You may now declare the establishment of your limited liability company (LLC), celebrate your new status as a business owner, and go on to the next important phase of running your company.
- Create a company bank account and obtain an Employer Identification Number
When your limited liability company (LLC) is up and running, you may go to the IRS and get an EIN. Like a person’s Social Security number, your company’s EIN is a nine-digit number that is used for federal tax purposes.
Although an EIN is not strictly necessary for single-member LLCs that do not have any workers, many banks nevertheless request one when you create a commercial bank account. To provide peace of mind, even in single-member setups, an EIN may be preferable than a Social Security number because it helps secure private information.
A federal tax identification number (EIN) is necessary for the employment of employees, the filing of taxes, and the application for business licenses for any limited liability company (LLC) having more than one member or any employees at all. There is no fee to obtain an EIN through the IRS website. Establishing a business bank account allows you to manage the revenue and spending of your limited liability company (LLC) once you have obtained an Employer Identification Number (EIN).
- Collect necessary authorizations for your company
To lawfully operate your business, you may require one or more licenses or permits, depending on its nature and location. The following is a list of the most typical ones:
- Seller’s permit: A seller’s permit or sales tax license is typically required by states that impose sales taxes on taxable products and services. You can collect sales tax and send it to the state with this permission.
- General business licenses: General business or operating licenses are required by law in certain states for all registered enterprises. A business license is often required in order to conduct business inside the borders of a city or county.
- Industry-specific licenses: The issuance of liquor licenses, occupancy permits, and commercial fishing licenses is only a few examples of the many licenses that are subject to regulation by the federal, state, and local governments.
- Registration in other states: You are required to register your firm as a foreign limited liability company (LLC) in every state where your business has a physical presence, regardless of the jurisdiction in which you founded your LLC.
- DBAs: In most cases, a DBA filing is only necessary when conducting business under a name different from your legal name. Your limited liability company (LLC) does not require a DBA if it just uses its formal name. It’s possible that you’ll have to submit paperwork to the appropriate local, county, or state agency in order to get a DBA.
To find out what kinds of licenses and permissions your company could require, it’s a good idea to contact trade groups within your industry as well as your local and state governments. On the other hand, you might hire a business adviser to make sure you have all the necessary resources to launch your company.
Next Steps After Forming an LLC
You must attend to a number of time-sensitive matters immediately upon the official creation of your limited liability company. Although not strictly necessary for forming an LLC, several of these items are essential for the lawful operation of that LLC, including obtaining the appropriate permissions. On the other hand, learning the tax laws that apply to limited liability companies (LLCs) may help you save time and money if done correctly.
- Find out about LLC tax considerations
The formation of an LLC does not simplify the complex world of tax law. One of the most difficult things for a newly formed limited liability company (LLC) to do is to deal with business taxes correctly; problems that might arise from this include:
- Interest and fines: The Internal Revenue Service (IRS) can levy hefty fines and interest charges if you submit your LLC’s tax returns in an inaccurate manner.
- Unclaimed deductibles: Keeping tabs on every potential deduction might seem like an insurmountable task for both new and old organizations. But if you don’t claim things like a home office, business travel, and software and hardware used for your company, you’re just throwing money away.
- Legal fees: In the worst-case scenario, the IRS may conduct an audit or inquiry into your company due to inaccurate taxes, which might mean you need to bring in experts in accounting and law.
Since the Internal Revenue Service does not employ a singular tax categorization for limited liability companies (LLCs), they stand out from the crowd when it comes to tax strategies. By default, the IRS treats one-member limited liability companies as sole proprietorships or “disregarded entities,” while multi-member LLCs are treated as partnerships. However, LLCs have the option to disregard this default classification and instead file as either a S corp or a C corp, each of which offers its own set of advantages:
When a business owner files their taxes as a sole proprietor, their profits are “pass-through taxed,” or recorded on their own tax returns rather than the business’s.
Partnerships, like sole proprietorships, permit pass-through taxation, meaning that members pay taxes on their portion of the business’s income.
Forming an S corporation allows the company to avoid paying federal income taxes in most cases, but the shareholders will have to pay taxes on an individual basis.
Choosing to form a C corporation allows companies to take advantage of more tax planning options while still being liable for corporate income tax.
To make the best decisions for your business’s success, it’s important to know the different tax options available to limited liability companies (LLCs), so it’s crucial to talk to an accountant or tax expert about the potential tax implications of your LLC.
- Keep in good standing and comply
The last thing you need after forming an LLC is to get into legal issues because you didn’t follow the rules. To avoid federal and state penalties, make sure to:
- Keep yearly records
- Cover any LLC-related expenses
- Keep yourself updated on the LLC regulations in your state
- Owners of an LLC may have to pay franchise taxes
The long-term success of a limited liability company (LLC) depends on your ability to keep it in compliance and good standing so that you can safeguard your personal assets, run your business legally, and build credibility with clients, customers, and partners.
- Register your LLC in other states
Establishing a “state of formation” or “domestic state” while forming an LLC in your home state is like laying the groundwork for your firm. If you plan to grow into other states down the road, though, you’ll have to register as a foreign LLC in those other states.
The failure to correctly register your limited liability company might result in significant fines and penalties down the road; here, “expansion” means establishing an office, store, or workers in another state.
Keep these measures in mind when you want to form an LLC in a different state:
An official document stating that your limited liability company conforms with regulations in its place of creation is a certificate of good standing. Obtain one from your home state before contacting the state into which you intend to expand.
To apply for foreign qualification, you must first get in touch with the new state’s secretary of state and fill out an application that contains the essentials of your company and usually requires a fee.
Choose a new registered agent. If you did not do so before, be sure to select a new agent with a physical address in the new state.
Verify the local regulations. Check the local regulations of every state you intend to expand into. Your company may comply with the rules of your home state, but it may not with the new one.
Get ready to pay the fees and file the yearly reports. Every state where you establish your limited liability corporation requires you to do so.
Choosing the Right LLC from the 8 Available Options
Here is a brief overview of the eight most common kinds of limited liability companies (LLCs), each of which may provide different advantages depending on your individual situation.
1. Domestic LLCs
The most prevalent and easiest to organize and manage is the domestic limited liability company (LLC), which is defined as an LLC that conducts business inside the state of its formation.
2. Foreign LLCs
Despite the name, a foreign limited liability company (LLC) does not conduct business in another nation. Rather, an LLC is considered “foreign” when it conducts business in a state other than its formation state. For instance, a Wisconsin-based LLC that wishes to expand to California would have to register as a foreign LLC in California.
3. Professional LLCs
Professional limited liability companies (PLLCs) are a relatively new kind of limited liability company that were formed to serve the needs of certain sorts of licensed professionals, such as physicians, accountants, and attorneys. PLLCs often have rules dictating which kinds of individuals can be members.
4. Restricted LLCs
Restricted limited liability companies (LLCs) are a subset of general limited liability companies (LLCs) that, while not available in all states, can offer substantial estate planning advantages. One such advantage is that, for a certain period—usually ten years—LLCs cannot distribute their profits to their members. Instead, those profits must be reinvested into the LLC. This serves to both ensure the growth of the LLC and shield members from tax liabilities until the distribution period ends.
5. Anonymous LLCs
Some states permit the formation of anonymous limited liability companies (LLCs), which are ideal for individuals who desire the privacy benefits of an LLC structure without giving up full control over their financial and operational affairs to a single entity. In these cases, the “nominee manager” acts as the public face of the LLC while actually having no actual say in these matters.
6. Series LLCs
One common form of limited liability company (LLC) is the “umbrella” LLC, which allows its members to form a chain of sub-LLCs that ultimately report to the main LLC. Each sub-LLC typically has its own set of members, assets, and liabilities, making the “umbrella” concept attractive to business owners who want to spread their risk around.
7. Low-profit LLCs (L3Cs)
If you are seeking private investments for charitable or educational purposes, you may want to consider forming a limited liability company (LLC), which is a “hybrid” between a nonprofit and for-profit LLC structure. L3Cs are typically established with a social objective in mind but can also earn profits (within certain limitations).
8. Nonprofit LLCs
It is possible to form a limited liability company (LLC) for non-profit purposes, though this is unusual. The main difference with this type of LLC is that it can make a profit, but it must reinvest that profit or use it to further its charitable goals. One thing to keep in mind is that tax law gets particularly complicated with non-profits, so if you’re considering this type of LLC, you might want to consult an expert in non-profit taxation.
An LLC’s Benefits
1. Its own legal identity
Businesses that operate as limited liability companies are legally distinct from their owners and have their own set of powers and duties. For example, an LLC may be sued or sue in its own right, acquire, hold, and use its own personal or real property, enter into its own guarantees and contracts, lend or invest money, and the parties doing business with the LLC are not personally liable for any obligations or debts owed to them.
2. Limited liability
One major advantage of functioning as a limited liability company (LLC) is that its owners enjoy limited liability protections. This protection applies only to the value that the member has invested in the company and does not extend to the member’s personal assets, since the LLC is considered a separate legal entity.
Limited liability is not unconditional. If a member ensures the debts of the firm or co-signs a loan, then their assets are put at risk. Additionally, a court can disregard the LLC’s existence and seize the member’s assets. This is referred to as piercing the veil. This can happen if the member fully controlled the company and didn’t regard it as a separate entity.
It can also happen if the member took advantage of the entity form to do some wrong or injustice. Certain state laws explicitly state that the LLC’s separate existence may be disregarded in the same way as a corporation’s identity. However, even in states without this statutory provision, courts have acted to disregard the entity according to the actions of the member.
3. Perpetual existence
Unless otherwise stated in the articles of organization, an LLC is considered to have perpetual existence. This implies that there can be different owners without causing the company to dissolve. The retirement, death, or withdrawal of a member from the business for a different reason does not necessitate the company’s dissolution.
The dissolution of an LLC is limited to the following events, according to the majority of state statutes:
- Happens as per the terms of the operating agreement
- Members approve of dissolution.
- Business dissolution occurs as a result of a legal or administrative proceeding
Even in places where the LLC Act specifies that dissolution occurs upon the withdrawal or death of the last surviving member, the LLC might nonetheless allow for the appointment of a new member to carry on the business.
4. Adaptable organizational framework
The advantages of operating as a limited liability company or corporation include limited liability, separate existence, and perpetual existence. One unique advantage of the limited liability company is its flexibility in terms of the management structure that its members can choose from. Under state law, the members have control over the business.
That said, the LLC can specify in its operating agreement and/or articles of organization that it will rather be manager-controlled. Managers can be members or non-members, depending on the operating agreements. This flexibility makes the LLC suitable for both a small group of owners who want to run the business together and a large business venture with owners located in different parts of the country.
5. Having the freedom to freely shift financial interests
An individual’s financial rights and management rights are two components of their ownership interest in a limited liability company (LLC), which is known as a membership interest.
Financial rights of members include distribution rights, participation in losses and profits, and the ability to transfer these rights freely under the default statutory rule (the operating agreement can state otherwise).
Of course, the LLC’s operating agreement can change the default rules. For example, it can provide for less than unanimous consent. The majority of state statutes, however, place restrictions on the shift of the remaining interests, which includes the right to take part in the LLC’s management. Thus, a member cannot transfer or sell their entire interest, like management rights, without the approval of all the other members.
In addition, limited liability companies (LLCs) provide what is known as “charging order” protection, which safeguards the interests of the LLC and its members in the event that a member’s individual creditors try to collect on the member’s LLC stake.
6. Pass-through taxation
Limited liability companies (LLCs) are taxed at the individual level, meaning that their members pay taxes on their portion of the LLC’s losses, gains, deductions, income, credits, and other tax items at their individual tax rates. Unless it chooses to be taxed like a C corp, an LLC is not subject to entity-level taxation.
Here is where an LLC’s flexibility really shines. The operating agreement can determine the share of the tax items without regard to ownership interests. What’s more, the proportions of losses, profits, and other tax items are not required to be equal.
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