Not long ago, limited liability companies (LLCs) were considered to be relatively “new” legal structures. LLCs made their debut with the ability to provide liability protection, separating your personal assets from professional ones. For example, what if your small business racked up debt or ran into legal issues? Liability protection ensures that no one can come after your personal belongings, like your home or car. Without it, you could very well lose your shirt in addition to your business.
If you’re thinking that this sounds similar to a corporation, you’re right. A corporation also provides personal and professional asset separation. However, an LLC offers more flexibility than a corporation. The LLC structure allows for an unlimited amount of owners, has a simpler tax structure, and is easier to maintain.
[Related: Should I Incorporate or Form an LLC?]
In fact, the most difficult part of forming an LLC might just be the initial process. If you don’t know how to get started, let me take you through the steps.
1. Understand your state’s LLC rules and regulations.
Each state abides by different rules and every small business is different. For example, companies that form LLCs in New York must follow Section 206 of the Limited Liability Company Law. This states that a copy of their Articles of Organization or a notice related to the LLC’s formation is published in two newspapers for 6 weeks. LLCs formed in Delaware, on the other hand, pay an annual tax of $300 in lieu of filing an annual report. These rules may be subject to change, so do not assume that forming an LLC is the same process in each state.
While it’s technically not necessary, I advise seeking guidance from a lawyer. A legal professional can help answer any questions you have and determine what your business needs are, state by state.
2. Check for your company’s name availability before reserving it.
You have a great name for your business, but do not assume that it is not already in use elsewhere. Conduct a name search through the Secretary of State before reserving the name or filing to register it as a trademark. If you do not do this, you could accidentally be using someone else’s claimed name and infringing on their mark.
3. File articles of organization.
There may be additional paperwork that will vary from state to state, but, at the bare minimum, your LLC will be required to file articles of organization (also called certificate of organization or certificate of formation). This document should include the name of your LLC, the company address, names and addresses of its members, and the name and address of the LLC’s registered agent.
A filing fee will also need to be paid with the articles of organization, which must be prepared, signed and filed by its members.
[Related: What’s an Employer Identification Number?]
4. Appoint a registered agent.
Generally, this is a requirement for every business entity, not just LLCs. However, every state is a bit different so I recommend checking in with the Secretary of State to be certain your LLC needs one.
A registered agent is an individual or third party who serves as your point of contact between the business and state. The agent accepts official documents on your behalf, organizes and submits said documents over to you, and helps your business stay in compliance with state law.
If you decide to designate yourself as your own RA, the good news is that you can do this. However, you will need to make sure you are available during general business hours (Monday through Friday from 8 a.m. to 5 p.m.) to accept any documents. You must also be a resident of the state, have a physical mailing address (a P.O. Box is not acceptable), and be comfortable with receiving confidential paperwork in a public environment.
5. Draft an operating agreement.
While this is generally not a requirement by states, it is recommended that you draft an LLC operating agreement. This document outlines the way you want your LLC conducted and helps prevent any financial or management disputes within its members. Having it written provides a physical hard copy you can refer back to if you are unsure of the rules for how the LLC should be run.
This is, of course, just the basic groundwork for what is required for LLC formation. And of course, there’s so much more you’ll need to get your business off the ground — licenses, permits, business bank accounts — not to mention winning customers. But having liability protection in the form of an LLC is a smart way to start.
Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.