The first step when starting a business is to decide what kind of entity it will be. You have several options: sole proprietorship, general partnership, limited liability company (LLC), corporation, etc.
An LLC is a unique business entity that separates your assets from your company’s. What this means is, if someone sues your company and wins, they can’t go after your personal belongings like cars or houses as repayment for damages. Your personal property is “shielded” by the legal protection provided by forming an LLC. You also get some tax breaks that may not be available if you operate as a sole proprietor or general partnership.
However, you should be aware of the benefits and drawbacks of forming an LLC before making this decision. For example:
- Your business will become a distinct legal entity from yourself (the owner). Any debts incurred by the company will not affect your credit score or reputation. However, this may not apply in certain situations (when you guarantee payment for an LLC debt).
- You can choose to have your business operate as an S corporation or partnership instead of filing taxes under subchapter C of the Internal Revenue Code (IRC).This decision may provide some tax advantages for owners who meet specific criteria outlined under section 1361(b) of Title 26 United States Code (26 USC). Still, it requires separate paperwork and tax filings.
- You will be required to pay annual fees and file reports to maintain your status as an LLC in most states. The cost varies by State. However, it is generally on the lower end of the spectrum than corporations.
- LLCs have fewer formalities than other businesses, such as corporations.
For example, you do not need to hold board meetings and record minutes like a corporation. Still, it is vital to keep track of your business’s finances and activity to prepare for an IRS or state revenue agency audit.
LLC Services to use When Starting an LLC
If you’re not confident starting a business independently, you can have an expert help you. Numerous companies exist solely to help people create LLCs and other enterprises. They offer various packages, from help with the paperwork to everything needed for setting up an LLC. Additionally, some offer support after the business is established and running.
Here are four popular options for establishing an LLC:
- LegalZoom offers services for forming an LLC, corporations, non-profits, partnerships, estate planning, etc.
- IncFile provides different business formation packages and additional services such as registered agent services, registered office addresses, and consulting with lawyers or accountants. You can also get a free tax consultation from a CPA.
- RocketLawyer has multiple form documents you can use when starting your business and providing legal advice on contracts and other matters related to running your company successfully.
- ZenBusiness helps entrepreneurs start their businesses at low rates while providing excellent customer service through their website and app.
LLCs also have fewer tax complications than other businesses and are easier to set up. While the exact process is different in each State, some basic steps will always be necessary. Here’s how to start an LLC in 7 easy steps:
How to Set Up an LLC
1. Conduct An LLC Name Search
First, make sure another company or organization does not already use the name. You can check your chosen name against those already registered by using the Trademark Electronic Search System (TESS) of the Patent and Trademark Office (USPTO). Ensure that the business name follows state requirements. Every state has its rules on what you can and cannot include in a business name.
For example, many states require that your LLC’s name contain “limited liability company” or “LLC.” Check with your state’s business development office to see if it has specific requirements for naming LLC.
The name you choose should be easy to spell and pronounce. You don’t want potential customers struggling with how to find you online! It should also be easy to remember. If it’s not memorable, it won’t matter how good it is at drawing people in—they’ll never come back for more!
Finally, make sure the name describes what the company does or its core values. It should reflect who you are as a business entity so that customers will associate those qualities with you too!
2. Reserve A Name for your LLC
You can search for a business name to reserve it so that no one else can have it. Doing this may help if you plan on starting your LLC in the future, but you need a little time to get everything in order.
You can also reserve a business name before officially forming your LLC, but after choosing your desired business name. This is known as pre-forming an LLC. The advantage of pre-forming an LLC is that you can start advertising your company, taking orders, and spending money on marketing before forming the entity.
In most states, you have 180 days to file your Articles of Organization with the state.
To reserve a business name, submit an Application for Reservation of Name form with your state’s Secretary of State office.
As part of your application, it is crucial to explain why you want to reserve the name. You can’t just say that you plan on starting an LLC at some point; the State will want to know more details about when and how you plan to use the name.
3. Appoint a Registered Agent
In an LLC, the registered agent is the person or company that receives legal mail on behalf of the business. When you form an LLC, you need to ensure that someone will be available during regular business hours to accept legal documents on behalf of your business. You can also refer to this person as your “agent for service of process” or “agent for service of notice.”
The registered agent can be any individual in the state as long as they are over 18 years old. It can also be a business entity that the state has approved to act as an LLC’s registered agent. However, it would be best to consider working with an attorney who specializes in forming LLCs and can serve as your registered agent going forward.
4. File Articles of Organization With the State
Your articles of organization are the first legal document you’ll create when setting up your LLC. This document includes your company name, purpose, and principal address.
Filing of your articles of organization is done in the state’s secretary of state office, officially forming your LLC and getting it registered in that state. Depending on your state’s requirements, you can file an LLC online, by mail, or in person. You will pay a filing fee when you submit this document (this fee varies from state to state). Once it’s filed, you’re officially a legal business entity!
5. Create an Operating Agreement
Once you’ve set up your LLC, you must create an operating agreement. This is a legal document that outlines how your business will operate. The details included in this document vary depending on what type of business you run and how many members are in it. An attorney can help you draft one if needed.
While many states do not require an operating agreement, it is crucial to have one because it shields you from liability for business debts and obligations if someone sues the company. It also establishes your business credibility and helps if you ever decide to look for investors. Moreover, it makes it easier to open a bank account and get credit cards under the company’s name.
Some standard provisions that you should include in your operating agreements include:
First and foremost, the operating agreement should identify the LLC’s name, address, and state. It should also identify the members, both current and future.
You should state the purpose of the LLC in the operating agreement. In most cases, this will be “any lawful purpose” or “any lawful purpose for organizing an LLC under your State’s Limited Liability Company Act.”
3. Contribution of Members
The members can agree to contribute money or property to the LLC in exchange for their ownership interests in the company, or they can agree that they will not make any contributions.
The section of the operating agreement dealing with contributions should indicate how much each member is contributing and whether or not each member must make additional contributions if necessary.
4. Distribution of Profits and Losses; Allocation of Distributions.
The members can allocate profits and losses among themselves however they wish (unless doing so would violate public policy). It would help if you based this allocation on factors, such as the amount an individual contributed to starting the business.
5. Duration of Membership.
The members can agree to a limited membership duration or agree that the membership will continue until all members retire unless all members agree to dissolve the company before then.
6. Membership Interest.
The operating agreement should recognize the members and how much interest each holds. In most cases, this will appear in a separate document called a certificate of ownership, which will be filed with the state office and record how much each member is paid for their membership interest. However, most states do not require ownership certificates as long as the member’s investment records are available.
Types of LLC Operating Agreements
Generally, there are three types of operating agreements:
Single-Member LLC operating agreement
There is only one owner in a single-member LLC. In this type of operating agreement, the owner has total control over all decisions related to the company.
Multi-Member LLC operating agreement
There is more than one owner in a Multi-Member LLC. In this type of operating agreement, each member has equal voting shares unless otherwise specified in the document. The members then elect an individual or group of individuals to handle day-to-day operations on their behalf.
Partnership-Operating LLC operating agreement
A partnership-operating LLC has two or more partners who share ownership and profits of the business. Each partner has equal authority to decide how the company will run unless specified in the document.
Creating an operating agreement takes two steps:
Create a document that describes the management structure of your LLC, including the roles and responsibilities of each member.
Cover things like what happens if one of the members leaves or dies or how you will distribute the profits among members.
There are free templates online to help you get started or consult with an attorney specializing in small business law to ensure everything is covered.
Have all members sign the document in front of witnesses and have them sign as well (some states may require notarization).
Once signed by all members, this operating agreement legally binds you to abide by its terms and conditions.
But what happens if you want to make changes to your operating agreement? After all, as your business grows and evolves, so will its needs. As such, you should set no operating agreement in stone. Just like any contract, they can be amended or updated as necessary.
In most cases, you’ll need unanimous approval from the members to amend the operating agreement. However, it’s also possible that your state has a specific procedure for amending such documents.
6. Obtain Business Licenses and Permits
Business licenses and permits are essential for your business to operate legally.
The first step you’ll need to take is to check with your state and local government. Depending on what you sell, your location, and your target customers, you may need several types of licenses to operate legally.
For example, some states require that all businesses have a sales tax license, while others will require you to obtain specific permits for certain types of goods or services. Some states don’t even allow businesses to operate without a permit or license.
The main reason behind these laws is that they’ll help you pay the proper taxes and fees to the state and local governments.
However, it’s also important to understand the lengthy application process. You may have to submit your paperwork months in advance, or you may have to wait weeks for approval.
Because of this, you should start the application process for a business license or permit early. It will ensure there isn’t any delay in your ability to operate once you’ve opened your doors.
In some cases, it’s a good idea to work with an attorney who specializes in business law.
7. Opening an LLC Bank Account
After forming your LLC, you will want to set up a separate bank account for your business. It is essential for tracking your LLC’s expenses and income, and tax purposes. You should not use your credit card or other forms of payment for business transactions – this could create confusion when it comes time to pay taxes on your profits.
Your LLC needs its bank account because all deposits into the company go through that account. Some of the benefits of having an LLC Bank Account include:
Separate business transactions from personal ones
Keeping a clear line between your private transactions and those conducted by the business makes it easier to stay accountable and organized.
Establish a good credit score to obtain loans
Using the same credit card for personal purchases or paying bills late can decrease your credit score. It, therefore, becomes more challenging to secure loans or build professional relationships. Using a separate card specifically for business-related expenses helps keep finances in check and builds trust with vendors, partners, and lenders.
File taxes as an independent entity
After forming an LLC, you need to get an Employer Identification Number (EIN), which identifies the new legal entity rather than any individuals associated with that entity (like yourself). If you don’t have one already, contact the IRS directly by giving them a call or complete Form SS-4 online on the IRS website. Once approved, you will receive confirmation within minutes via email and instructions on how to access Form 8822.
Opening an LLC account is a lot easier than you might think. It may require a little bit of paperwork, but it’s not as cumbersome as you think.
Here are the steps to opening an LLC bank account:
- Find a bank that allows you to open an LLC bank account.
- Obtain a certificate of formation
- Get your EIN, or employer identification number
- Gather information about all owners of the business
- Fill out an account application online or in-person
- Sign the agreement with two signatures from owners and one from any other authorized signers on behalf of your company
- Make sure all documents are current and up-to-date before opening your new account!
With your bank account safely established, you can now start processing and paying bills for your new business.
File an LLC Today with Ease
While setting up an LLC is a relatively straightforward process, it is essential to understand that it is your responsibility to follow all of the rules, including registering your business name, obtaining a business license, and meeting any requirements regarding employee withholding.
Having an attorney specializing in business law review your paperwork to ensure that you do not overlook anything can be helpful. Once you have established your LLC, you must maintain separate accounts for your personal and business expenses to avoid commingling funds and inadvertently jeopardizing the liability protection afforded by the corporate structure.
Starting an LLC: Frequently Asked Questions (FAQs)
Q: Do I need an LLC for my business?
The answer to this question depends on a number of factors, including the type of business you have, your business goals, and whether you want personal liability protection.. If you are a freelancer or solopreneur, you may do fine with a simple sole proprietorship. However, if you’re not sure whether an LLC is right for your business, we recommend talking to a business attorney or accountant.
Q: Is an LLC expensive?
Compared to other business structures, LLCs are relatively inexpensive and easy to set up. You’ll need to pay a filing fee to your state’s LLC office and file articles of organization, which are typically just a few pages long. Some states also require you to publish a notice in a local newspaper announcing your intention to form an LLC.
Q: Can I set up an LLC by myself, or should I hire someone?
You can usually set up an LLC yourself, as long as you meet your state’s requirements. However, if you’re not comfortable doing it yourself, you can hire an attorney or registered agent service to help you.
Q: Do I really need to create an operating agreement for my LLC?
Yes, it’s a good idea to have an operating agreement for your LLC. This document outlines the ownership and management structure of your LLC, as well as the rights and responsibilities of each member. Having an operating agreement can help prevent disputes among members down the road.