How to Start an LLC
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What is an LLC?
Choosing a business structure is one of the first steps any prospective business owner should take before opening shop, not only because it’s legally required, but also because it determines how easy and expensive legally forming the company will be. For example, many first-time business owners will form their business as a Limited Liability Company (LLC) for its simple and cheap legal process as well as its flexibility.
An LLC is a type of business structure that offers exactly what its name implies: limited liability.
The owners of an LLC (also referred to as members) are not held responsible for their business’ debt. This protects their personal assets from being collected as collateral should the business go bankrupt or face legal battles.
LLCs also grant tax flexibility by providing its owners the option to be taxed as a C corporation, or as a pass-through entity such as: a single-member LLC, a multi-member LLC, or an S corporation.
The main difference between the two is that businesses taxed as C corporations must pay corporate and federal income taxes whereas a pass-through entity is only liable to pay federal income taxes as its profits and losses are “passed through” to the members or employees.
Disclaimer: The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or business. It is only intended to provide education.
How to Start an LLC.
Thankfully, starting an LLC is as (relatively) simple as its structure. Here are the steps needed to get started
1. Select a State
First and foremost, you’ll need to establish your LLC’s state of operation. In most circumstances, the best option is to form the LLC in whichever state the owner(s) reside in. If the circumstances are less clearly defined – for example, if multiple owners live in different states or along state borders – then it’s generally best to choose the state where the registered agent is most likely to reside.
There’s also the option to choose an out-of-state location. This can have its own benefits – such as friendlier business tax laws – however, doing so can bring down a wave of extra paperwork and fees on your company.
2. Name Your LLC
Up next is picking a name for your business. Outside of a few heated arguments between you and your other members about how your idea for the business name is totally better than theirs, this step should be straightforward.
While regulations vary by state, most states will require that your LLC’s name has:
- LLC or limited liability company somewhere in it.
- No words that would imply this business is a differently regulated one such as “bank” or “university.”
- No words or terms that would imply it’s part of a government agency (Treasury, FCC, etc.)
3. Identify a Registered Agent
New LLCs must also name a registered agent to send and receive lawsuits, subpoenas, and other legal documents on behalf of the LLC. The registered agent can be a member of the LLC or someone outside the business; however, in most states, the registered agent must be a resident of the state where you’re doing business.
4. File Organizational Documents with Your State
Next, you’ll have to file the organizational paperwork with your state. These documents (most commonly referred to as the “articles of organization”) to officially create your LLC. You can find these documents via your state’s Secretary of State website.
These documents are typically short and ask for:
- The business name.
- The purpose of the LLC.
- The names of all members (and sometimes the registered agent).
- The address of the LLC.
- How long the LLC has existed.
5. Create an Operating Agreement
In most states, there’s no requirement to create an operating agreement, however, it’s important to do so any way as an operating agreement establishes some of the most important internal functions of your business.
They establish things like the business’ management structure, how the profits are allocated among members, who gets what business assets should a member die, and more.
6. Get an EIN
Your business’ employee identification number (EIN) acts as a social security number and you’ll need it for most large financial documents (like when opening a business bank account or hiring employees) as well as most interactions with the IRS.
7. (Optional) File to do Business in Other States
Not all LLCs do a significant amount of business in states outside of their original state, but for the ones that do, they’ll need to register as a Foreign LLC. What counts as a “significant amount of business” varies by state, but you can usually assume that you should file if you’ve made over $500 in sales or have a physical storefront in that state.
The process for filing a Foreign LLC differs in each state, but most of the time you’ll need to file something like a “certificate of authority” or “application for authority” along with a “certificate of good standing” from your home state.
Putting it to Work
Forming an LLC can be a short and simple process – even for first time business owners. What comes after signing all the documents is a lot less straightforward.
Luckily, Atlantic offers free consultative advice for small businesses to help you plan future business purchases and handle your accounting.