If you’re starting a business, congratulations! You have quite an exciting journey ahead.
If you’re planning to form a limited liability company (LLC) you’ll be getting off to a great start since LLCs offer many benefits, including personal liability protection.
Setting up an LLC involves several steps, which we’ve detailed in this handy guide.
Check LLC Name Availability
You’ve no doubt chosen a great name for your LLC, but you need to make sure that it’s available to use.
Your first step should be to check your state’s LLC name regulations.
In all states, your name must contain either the words limited liability company or one of its abbreviations.
In most states, your name cannot be one that confuses your business with a government entity or that contains words like bank or university.
Some states have further restrictions, so be sure to check with your state’s government.
Once you have a name that complies with state laws, you need to do a business name search to make sure the name is not already taken.
You can usually do so on your Secretary of State’s website.
You also need to make sure the name is not trademarked by checking with the United States Patent and Trademark Office.
Finally, check that the domain name you want is available by going to a website like GoDaddy.
Select a Registered Agent
In all states, your LLC is required to appoint a registered agent, which is an individual or business entity that’s authorized to accept official correspondence on behalf of your LLC.
You can generally be your own registered agent, but by doing so, you’ll be required to be personally available at your registered address during business hours.
You can instead appoint an attorney or a registered agent service as your official registered agent.
Registered agent service costs range from $100 to $300 annually.
Determine Your Management Structure
You have two options when it comes to your LLC’s management structure.
The first option is a member-managed LLC, where all members play an active role in the business’s management.
Each member contributes to decision-making and operational aspects.
A manager-managed LLC is the second option, where specific members are designated as managers while others can act as silent partners.
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Additionally, non-members can also assume managerial roles.
In the majority of cases, LLCs operate under a member-managed structure.
Here, all members participate in managing the business, making collective decisions, and sharing responsibilities.
However, situations arise where a member, despite holding a stake in the LLC, might not be engaged in management tasks.
This usually occurs when the LLC has an investor who is a member primarily for their financial contribution rather than managerial involvement.
Officially Register Your LLC with the State
Now you’re ready to officially register your LLC with your state. In most states, you can do so online by filing articles of organization, although the document has a different name in some states.
Filing is usually done on the Secretary of State’s website.
Fees to file range from $40 in Kentucky to $500 in Massachusetts.
Read more about state-specific filing requirements.
Draft an Operating Agreement
While not mandated by most states, an operating agreement holds significant importance for your LLC.
It details ownership percentages, profit distributions, conflict resolution protocols, member voting privileges, procedures for ownership transfer, and various other components.
Even when the sole member of your LLC is you, the operating agreement will substantiate your ownership of the business, which may be required when establishing bank accounts or seeking business loans.
In cases where your LLC has multiple members, the operating agreement serves as evidence of your ownership proportions and provisions to facilitate member dispute resolution.
While operating agreement templates can be found online, it’s often advisable to seek legal assistance when drafting the document.
Choose Your Tax Status
LLCs are unique in that they can choose their tax status.
If you don’t elect to change your tax status, by default, your LLC will be taxed as a sole proprietorship if you’re the sole member, or a partnership if it has multiple members.
In both cases, the profits pass through to the member or members to be reported on their personal tax returns.
The LLC is not taxed separately.
Instead, you can choose S Corp status, which still offers pass-through taxation but can reduce self-employment taxes for members.
However, S Corp status comes with additional administrative requirements and costs, so S Corp status is only beneficial if the self-employment tax savings are greater than the additional administrative costs.
This usually occurs when the LLC reaches a certain level of profit. A tax advisor can help you to determine if S Corp status is right for you.
Final Steps
You have just a few nuts-and-bolts steps left.
Obtain an EIN
If your LLC has employees or if it has more than one member, you’re required to obtain an Employer Identification Number (EIN) which is a tax identification number for your LLC.
You can easily obtain one for free on the IRS website.
Open a Business Bank Account
It’s crucial to keep your business and personal finances separate to maintain your personal liability protection.
If you comingle funds, it can blur the line between you, as an owner, and the LLC.
Most banks offer business bank accounts.
You’ll likely need to provide your articles of organization, your operating agreement, and your EIN.
Get Business Insurance
Talk to your insurance agent about the types of coverage your specific business may need.
At the very least, you’ll likely need general liability insurance.
In Closing
Setting up an LLC takes a bit more than simply filing a document with the state.
Be sure not to skip any of the steps, particularly the operating agreement, so that your business launch goes smoothly.
If you need assistance, seek the help of an attorney or you can use a business formation service to help you with the process.
Once you get through it, you’ll be ready to open for business and make some money!
