Forming an LLC is a smart step when starting a business, primarily because it protects the owner from business-related lawsuits. The thought of forming an LLC may seem a little intimidating, but we show you how to form one with our step-by-step guide.
Unlike a sole proprietorship or general partnership where the small business owner can be personally liable for lawsuits against the business, the LLC is a separate business entity. By creating a new business entity, the owner’s personal assets and the assets of the business are separated, which provides protection from lawsuits. Besides the liability protection, the Limited Liability Company provides several other benefits over the sole proprietorship, partnership, and corporation because of the multiple tax options, ease of administration and management flexibility.
Read – how the LLC can protect your personal assets.
Also see: LLC vs. Corporation | What’s Right for You?
The requirements to form an LLC are different by state. Below, we summarize the information most states need when forming an LLC. At the end of this page, we have links for the step-by-step guide to form a Limited Liability Company in each state.
Articles of Organization
The first step in forming an LLC is filing the Articles of Organization (sometimes called the Certificate of Formation or Certificate of Organization). The Articles of Organization are the name of the form used to create an LLC. These Articles are then filed with the Secretary of State or similarly named department.
The following sections are some common questions asked on the LLC Articles of Organization.
LLC Name
Deciding on the perfect name for a business can be a challenge, but registering a name for an LLC can make it more difficult. When forming a business entity, which includes the LLC and corporation, each state requires the names of these business entities to be unique from any other registered entity in the state. The level of uniqueness varies by state. It is frustrating to decide on a name and then find out is that the name is already registered. One suggestion is once you have a list of names, some can be quickly eliminated by doing a business name search to make sure it’s available to use.
Each state has a few restrictions on naming an LLC. Common words that can’t be used usually include names including insurance, bank, or the name of a state or government agency.
Last, a designator has to be used. A designator is a word to describe the type of business entity and is placed at the end of the business name. Common designators include LLC, L.L.C. or Limited Liability Company.
After picking your name, each state offers the ability to register it before forming the LLC, with a filing fee. Registering a name beforehand isn’t required and can be done at the time of filing the LLC without having to pay extra. If you aren’t ready to register the LLC, many states allow delaying the filing for up to 90 days.
Principal Office
An LLC will need a physical address (no PO Boxes) in the state where the LLC has formed. The office can be the street address of the LLC’s office, a home address or an address where the business records are stored.
Choose a Registered Agent
Each state requires that there be a person or company with a physical presence in the state. This person is called a registered agent and must have a physical address in the state to receive legal documents, tax notices, summons, subpoenas, etc on behalf of the LLC.
The registered agent can be one of the LLC members (owners) of the LLC, attorney, friend or commercial registered agent.
Even though the business owner can be the registered agent, their name and address become public record and with that comes a loss of privacy. This is more important for some entrepreneurs, especially when they are doing business from home.
Management
Some states will want to know how the LLC is managed. There are two options:
- Member-Managed LLCs have members with an active involvement in the management of the business. This is how most LLCs are managed.
- Manager-Managed LLCs have a manager hired by the members to run the LLC, like a CEO of a corporation.
Costs to Form
The fees to form an LLC varies by state. Amounts vary between $40 and $500 depending on which state the LLC is being registered.
After forming the LLC
Filing the Articles of Organization with the Secretary of State is a major part of forming an LLC, but, there are a few other items to complete.
Operating Agreement
An Operating Agreement is a legal document outlining the roles and responsibilities of the members of the LLC, how to distribute profits, who has signing authority, the LLC tax status and much more. An Operating Agreement is only required in California, Delaware, Maine, Missouri, Nebraska, and New York. Even though it is not required to create an Operating Agreement in most states, it’s especially recommended for multi-member LLCs.
EIN
After filing the LLC, be sure to register for an Employer Identification Number (EIN) with the Internal Revenue Service (IRS). The EIN is like a social security number for an individual, but instead for a business. This number is required before registering with the state, open a checking account for the LLC or hiring employees. There is no cost to apply, and it takes about 5 minutes to get. See how to apply for an LLC EIN.
Licenses & Permits
Not directly related to the LLC, most businesses will need to apply for business licenses, sales tax permits, self-employment taxes and more. See the Guide to Starting a Business in your state for more information.
How to Form an LLC in your State
Each state has different requirements for forming an LLC. Select your state to see how to form a Limited Liability Company.