What is a limited liability company?

 

LLC is a type of business entity that is similar both to corporations and private partnerships. LLCs provide liability protection to the personal assets of the owners. LLCs also offer a lot of benefits in terms of management, taxation, and the allocation of profits or losses.

As a legal entity, your LLC company can own assets, sign leases, loans, and other contracts. Since it’s legally a separate entity from its owners, you are not liable for business obligations.

A step-by-step guide to LLC formation

Here are the main steps which are required to start your limited liability company.

1. Select the state

It’s best to file your LLC where you plan to do your business. If you plan to register a company in different state, then you must register a foreign LLC. In most cases it is cheaper and more beneficial to have an LLC formed in the same state you plan to do business in. Make sure to double check all fees and requirements related to starting an maintaining an LLC in the state where you plan to incorporate.

2. Name the company

Here are the general naming guidelines on how to name your LLC, some states may have additional requirements:

  • The name must include the phrase “limited liability company”¬†or any of its abbreviations.
  • The name must not include words that could lead customers to confuse your company with a government agency.
  • Restricted words could require extra paperwork and a licensed person, such as a doctor or a lawyer, to be a member of your LLC.

3. Choose an agent

A registered agent is a third party, either a person or a business, whose task is to send and receive legal documents on your behalf. Such papers include official correspondence and document filings. Naming a registered agent is not obligatory in most states, but many choose to use one no to disclose their registration address to the public. Registered agent’s address must be provided in your filing documentation.

4. File the LLC

You must file formation documents with the state to legally form your new company. These are often known as Articles of Organization or a Certificate of Formation, which must be filed with the local Secretary of State. Usually at this point you have to pay the filing fee which varies from state to state.

5. Create an operating agreement

An operating agreement for your LLC is a legal document outlining the member roles and ownership structure of your company. Having such a record is not required in most states, but it’s still a good idea for the following reasons:

  1. Management & Voting: Determining whether the LLC will be managed by its members or by an appointed manager, is done by an operating agreement. In addition, this document clarifies members voting rights. Even though each member has one vote, an operating agreement is used to give some members more voting power than others.
  2. Capital Contributions: The amount of money each member has invested in the business is precisely defined by an operating agreement. There should be no loopholes left in this regard, which a good operating agreement successfully covers.
  3. Distributions: Dividing profits and losses among the members – equally or according to their capital contributions. This should be laid out in an operating agreement.
  4. Changes to Membership Structure: In the event that a member leaves the company, it is essential to lay out the process for buying out and/or replacing a member in an operating agreement.
  5. Dissolution: An operating agreement allows you to outline hypothetical process of dissolving your business.

Having these on paper can help you avoid future problems.

6. Get an EIN

EIN, or employer identification number, is a sort of social security number for your new LLC. On top of identifying the tax obligations of a business, the employer identification number must be used to open accounts, to get credit for the business, and possibly to get licenses or permits, depending on the state, the form of the business, and the nature of the business.