How To Start An LLC

Introduction

One of the first and most crucial choices for entrepreneurs is selecting the appropriate business entity for their concept. There is a range of business entity options available, including sole proprietorship, S corporation, C corporation, limited liability company (LLC), and limited liability partnership (LLP). Your choice of company structure will hinge on the level of risk you are prepared to undertake.

If you seek greater liability protection than what a sole proprietorship offers, yet are not prepared to commit to registering as a S corp or C Corp, opting to get an LLC is a highly advisable decision. Prior to initiating the process of getting an LLC, it is recommended to continue reading or contact our small business attorney in Los Angeles to assess whether it aligns with your specific needs and circumstances.

Advantages of Getting an LLC

The primary and most substantial advantage of getting an LLC lies in the concept of limited liability. Fareed Kaisani, a Dallas lawyer, this concept refers to when the owners, or members, are shielded from personal liability for the business’ legal obligations or debts.

As well as this personal liability safeguard, Kaisani points out that LLCs have the flexibility to choose their tax classification. They can opt for taxation as a partnership (in the case of multiple members) or a sole proprietorship, or they may choose to be taxed in the manner of a corporation. The second choice can yield major tax advantages.

However, merely getting LLC status is just the initial step. Further exploration into the various kinds of LLCs is necessary to pinpoint the one best suited to your specific situation.

Another notable advantage is that an LLC offers a fairly uncomplicated and adaptable organizational structure. As Bianca Lindau, a corporate associate in Boston, explains, members can include U.S. or foreign individuals, corporations, partnerships, trusts, or different LLCs. Even foreign parties can get an LLC. It is worth noting that banking institutions and insurance companies typically do not have the option to get LLCs. It is advisable to check the regulations of your state or the state in which you will be doing business for any differing or additional requirements.

Yet, merely choosing to get an LLC is not the end of the decision-making process. It is essential for owners to get the specific type of LLC that aligns with their preferences, and whether they intend to actively engage in day-to-day operations or prefer a more hands-off approach, as Martin Gasparian, a California lawyer, advises.

10 Steps on how start an LLC

Start your LLC (Limited Liability Company) in 10 simple steps including choosing a DBA, and getting an EIN.

1. Select the Appropriate Type of LLC

No LLC is exactly the same. There are various kinds of LLCs, each with its own unique characteristics. These can be broadly categorized as follows:

• • Member-Managed LLCs: In this type, referred to as members, the owners actively oversee the company. Only a designated group or individual has the authority to manage the company.
  • Series LLCs: This structure resembles a corporation with multiple subsidiaries. It comprises an umbrella or parent LLC with one or more LLCs beneath it. Each series LLC is distinct and has limited liability, allowing risk to be contained within different entities without the expense of establishing new ones.
  • Restricted LLCs: Recognized in Nevada, this type of LLC has a unique feature. Owners cannot receive profits for a minimum of 10 years from the formation date or conversion to a restricted LLC. While primarily utilized in Nevada for the purpose of estate planning, a key advantage is that profits are not subject to taxation during this period. Instead, they are taxed at a much lower rate upon distribution due to discounts in valuation.
  • Anonymous LLCs: In this type, the members’ identities are not disclosed publicly. States that offer this option include New Mexico, Delaware, Wyoming, and Nevada.
  • Professional LLCs: Tailored for professionals like doctors, attorneys, and architects, this kind of LLC provides the same level of protection as other limited liability companies. However, it comes with the additional requirement that all members should be licensed professionals within the same industry.

Member-managed LLCs offer further customization. They can be either multi- or single-member, and in the case of multi-member LLCs, they can be categorized based on the members’ relationship to one another. If the members are family, it can be termed a family LLC. If they are unrelated, it could be referred to as a general LLC. (Note that not all states recognize these specific forms of LLC.)

Once you have made your selection, you can proceed to the next step.

2. Select a Business Name

Once you decide to get an LLC, dedicate some time to brainstorming the name for your new LLC. While considerations for branding and marketing are important, there are also crucial legal factors to take into account.

Your business name must include “LLC” to denote its legal structure. Also, it should not contain any words that are restricted by the state in question. For instance, terms like “insurance” and “bank” are typically restricted by the majority of states. Refer to your state’s business office website for a comprehensive collection of restricted words.

Furthermore, it is imperative to confirm that your chosen name is not already in use within your state. If the name is available, the state might permit you to reserve it and get your LLC until your documentation is officially filed. In many states, the business name is automatically approved when you file your articles of organization, eliminating the need for a separate registration.

When you get an LLC, it is also important to avoid infringing on any existing trademarked names. The Trademark Electronic Search System, controlled by the U.S. Patent and Trademark Office, provides a database of pending trademark applications and registered trademarks. While not mandatory, conducting this search is a prudent business practice. You certainly would not want a name that closely resembles another LLC.

Lastly, consider securing your business name or a variation of it as a domain name. This step is highly recommended to establish an online presence that aligns with your LLC’s identity.

3. Get a DBA Name

After you have settled on a name, it is important to decide if you intend to operate your business using that exact name. If you plan to conduct your business under a name distinct from the officially registered business name of your LLC, you will have to file for a “doing business as” (DBA) name. This alternate name, also referred to as an assumed or trade name, differs from your LLC’s officially recorded business name. It is worth noting that not all states mandate the registration of a DBA. To ascertain the specific process for registering a DBA in your state, consult your state’s business office.

4. Submit Articles of Organization

To get your LLC, you must submit the articles of organization to your state. While the title may vary (ex: articles of formation), they essentially serve the same purpose.

Typically, to get an LLC, your state’s business or filing office will offer a readily accessible document that can be obtained either online or in person. The specific information needed may vary by state, but generally, you will be required to furnish the address and name of your LLC along with the members’ names.

After completing the form, submit it to your state with the applicable filing fee. The U.S. Small Business Administration keeps a collection of links to business offices in different states on its website. Refer to the relevant state’s site for further details on where to file and inquire about any associated filing fees, if applicable.

5. Appoint a Registered Agent

In most states, designating a registered agent, also known as an agent for service of process, is mandatory. This individual will be responsible for receiving notices related to legal proceedings, official government correspondence, and documents pertaining to compliance on behalf of your business. Usually, the registered agent is one of the members of the LLC.

6. Create Your Operating Agreement

While not obligatory in many states, drafting an operating agreement is a highly advisable step in getting an LLC as it establishes a framework for critical internal business decisions. This document provides clarity on essential matters, including the allocation of voting responsibilities and rights, the distribution of ownership percentages among members, protocols for the transfer of members’ interests, and delineation of members’ powers and duties. It is recommended that before you get an LLC you check with your state’s business office to ascertain if an operating agreement is a requirement.

7. Publish a Formation Notice

Before you get an LLC, certain states may mandate that you publish a notice in a local newspaper announcing the establishment of your LLC. It is important to check with your state’s business office for specific details on the content of the notice, how often it needs to be published, as well as any additional requirements that may be applicable.

8. Secure a Business Permit and License

The majority of small businesses will require some form of business permit or license. The specific permits or licenses needed will be contingent on both local and state government regulations, as well as the industry in which your business operates. To determine the necessary requirements, consult with the business offices of your state, county, and city.

9. Acquire an EIN Number

While not usually mandatory, many banks and financial institutions like using Employer Identification Numbers (EINs) instead of Social Security numbers when establishing bank accounts for businesses. If you anticipate hiring employees in the future, getting an EIN is a federal tax requirement. The process of getting an EIN is straightforward and swift. Visit the IRS website to complete a brief form. Upon submission, you will receive your EIN. You will also receive a printable letter, and a physical copy will be sent to you by mail.

10. Establish a Bank Account for Your Business

After obtaining your business license, you should then be sure to set up dedicated bank accounts for your new LLC. According to Lindau, this separation is valuable as it provides a clear view of expenses and income, facilitating financial decision-making and accounting efforts.

Usually, when individuals get an LLC, they opt for one or more of the following types of accounts:

• Business Checking: This account enables the deposit and withdrawal of funds, online transactions, and check writing. While these accounts may have associated fees, they provide different features like merchant services, overdraft protection, and credit cards.
• Business Savings: This account accrues interest on surplus funds, though the interest rate is usually lower compared to personal savings accounts. However, it may offer additional benefits tailored to business owners.
• Merchant Services: If you intend to accept credit or debit card payments, this account is essential. It allows you to process card payments and receive funds directly into the checking account for your LLC.
• Business Line of Credit (LOC): A LOC is valuable for short-term financing needs. It permits your company to borrow funds when necessary and repay them over time, similar to a credit card. Usually, a LOC needs collateral and carries a higher interest rate compared to other kinds of loans.

Kaisani emphasizes the importance of thorough research and comparison when it comes to interest rates, fees, and features of different bank account options. This ensures that you find the best fit for your LLC’s specific requirements.

Additional Factors to Keep in Mind for Your LLC

When deciding to get an LLC, it is important to factor in state and local formation as well as ongoing maintenance costs. According to Kaisani, these encompass state charges, filing fees, and continuing expenses such as legal fees, annual reports, and taxes.

For instance, using Nevada as an illustration, the filing cost to get an LLC is $75. There is an expedited 24-hour service fee of $125. Additional setup costs include the business license fee ans annual list fee. For businesses located in Las Vegas or the greater Las Vegas area, supplementary charges apply. Following state filing, a general service business would incur a fee for the local business license and additional charges for processing. If the business operates from a residence, an extra fee is added. It is important to note that there is not a standard fee for a business license in Las Vegas.

If you intend to conduct business in other states, you should be aware that you will need to undergo a process known as “foreign qualification” in the new state, which involves additional fees.

Furthermore, Kaisani emphasizes the importance of maintaining accurate records and documentation for LLCs. This includes the company’s financial statements, operating agreement, as well as meeting minutes. This task can be time-intensive and may necessitate professional assistance, especially for unique partnership arrangements. Kaisani advises seeking guidance from a licensed attorney in your state when you plan to get an LLC.

Gasparian also highlights the need for foreign qualification when expanding business operations into other states. This process involves obtaining authorization to conduct business in the state where you plan to broaden your corporation’s activities. Foreign qualification is essential when a company establishes a physical presence or economic ties to the additional state, and when it reaches a designated income threshold in that state.

For further information on forming limited liability companies, the IRS provides additional resources.

Is getting an LLC a good idea?

Determining whether to get an LLC is not a straightforward decision. As Lindau suggests, “It really hinges on your individual circumstances.” LLCs serve a range of purposes, from property holding to business operations. If the venture is short-term or a one-time occurrence, the investment of time and money may not be justified.

However, if you have plans to expand and anticipate dealing with third parties in your industry, the effort and cost of getting an LLC become more justifiable. As Lindau emphasizes, selecting the optimal legal structure for your business should involve careful and comprehensive evaluation, ideally with expert advice, taking into account all pertinent facts and circumstances.