How to Form an LLC

Deborah Sweeney By Deborah Sweeney

Deborah Sweeney of MyCorporation.com provides a step-by-step tutorial on how to establish a limited liability company for your business.

How to Form an LLCLimited liability companies have become the business entity of choice for most entrepreneurs. By some estimates, there are nearly two LLCs formed for every corporation.

It’s pretty easy to explain that meteoric rise. Like corporations, LLCs are considered a separate, legal entity. That means they can take on, and are liable for, their own debt, helping protect the personal property of those running the business if the company goes under.

But unlike corporations, LLCs are very easy to maintain and have a much simpler tax structure. In fact, the most difficult part about running an LLC might be the process of forming it. Don’t let that keep you from forming your own LLC, though. With a little help and research, LLC formation can be a breeze. Here’s how.

Step 1: Do your homework.
I always start this process by advising people to research the laws and regulations of their home state. Each state has its own laws on the books and governance requirements – Arizona and New York, for example, require business owners to publish their intent to form an LLC before actually forming one. Most states, however, have fairly uniform laws. You’ll have to file your paperwork with either the department of corporations (if your state has one) or its Secretary of State, name a registered agent, and pay a fee.

Related: The Five Perks of Forming a Benefit Corporation

Step 2: Choose a name.
Nearly every state requires that LLCs identify themselves as such by including some form of limited or LLC in their name. Most states also forbid LLCs to include words like ‘bank’ or ‘insurance’ in their name but, again, this differs from state to state. When you decide on a name, head over to your Secretary of State’s website and see if you can search the names of other business entities, just to make sure no one else has already claimed that name. If it looks like you’re in the clear, the next step is to file paperwork.

Step 3: File formal paperwork.
Normally, an LLC has to file a form called its ‘articles of organization’ – again, though, some states have different names for these forms. At the very least this form will ask you to include the name of your LLC, its address, the names and addresses of its members (owners), and the name and address of its registered agent. You will also have to pay a filing fee, which is usually about $100.

Step 4: Draft an operating agreement.
There isn’t a single state that requires LLCs to have an operating agreement, but it is easily one of the most important documents to have in place before an LLC opens for business. The operating agreement sets out the rules for how the LLC should be run, and ensures that any formal procedures that the owners want in place will be followed. An operating agreement will also help you to defend the business’s structure if the state believes the business isn’t operating as an LLC should.

Related: Five Sources of Money for Your Startup

Step 5: Make a maintenance plan.
Keeping your LLC in good standing with the state is a lot easier than maintaining a corporation, but there are still a few hoops you’ll have to jump through. Most states ask that LLCs file an annual report, which will contain much of the same information as the articles of organization. Make sure you know when you need to file that report by – the state will likely send a reminder to your registered agent when the date is approaching, but you can’t rely on that. You will also have to pay a fee, which varies from state to state; California, for example, charges LLCs an $800 annual franchise tax, while the annual report license tax in Wyoming can be as little as $25. Knowing what to expect is vital to keeping in compliance.

Forming an LLC is one of the best things you can do for your business, and for yourself. And, since an LLC is taxed as a standard partnership and doesn’t require that you adhere to a bunch of state regulations, they are a lot easier to run. The trick is knowing what to expect, and what is expected of you. And if you need any help, there are plenty of people and businesses more than happy to give you an extra hand in the process.

Posted: October 21, 2013

Deborah SweeneyHow to Form an LLC