Set Up an LLC Properly: The Essential Steps
This Special Article sets forth the key steps
to set up an LLC the right way. Please read the entire report and understand the
material in each step before actually implementing the
steps for your business.
STEP
1: Select Name for your LLC
The first step is to find a good name for your new LLC
business. The name must
be accepted by the government agency that is responsible
for forming limited liability companies in your state.
Generally, the state agency will not approve a proposed
LLC name if the proposed name is the same as,
deceptively similar or not distinguishable on the
records from another legal entity registered with the
state.
It is a good idea verify
that your desired LLC name is available prior to filing
the documents required to set up an LLC. The LLC
Expert offers a
free name search for most states when available.
Please note that in addition to state LLC name use, you
may also want to check with your locality to make sure
no one has registered the name for use with a sole
proprietorship. There are also federal trademark
considerations. If you are going to be selling goods and
services on a mass scale and developing a brand, you may
want to search the database of the United States Patent
& Trademark Office and consider hiring a trademark
attorney if your trademark and logo are going to be very
important to your business.
STEP 2:
Prepare Formation Documents to Set Up an LLC
Business owners form limited liability
companies for many
reasons but the main one is limited liability. In some
states, an LLC is not formed until the formation
documents have been processed by the
state agency and a Certification of Organization has
been issued by the agency. If your LLC will be
formed in one of these states, this is important because
you will not have liability protection when conducting
business until your LLC has been formed.
Also most state agencies take awhile before processing
LLC paperwork. Many business owners think that
once they make the decision to form an LLC, the LLC will
be formed immediately. This is not the case with a
regular filing in most states. The actual
processing times vary and can be as long as 30-60 days
or more!
Now, if you need an LLC formed fast and you need to
receive the Certificate of Organization to evidence the
formation, most states have an expedited filing process
which can form your LLC in a day or two (sometimes even
the same day). You will pay a lot more for
expedited filing costs.
Once you know that you are going to start a business and
you want to set up an LLC for that business, you should get
the formation process started.
Make sure you keep a copy of your articles of
Organization before you file because many agencies do
not return the original and copies can only be obtained
by paying a fee.
STEP
3: Appoint a Registered Agent for your LLC
All states require that every LLC have a
named registered agent. You will need to determine the registered agent
for your limited liability company prior to filing the
formation documents (Step 2 above) required to set up an
LLC.
The purpose of the registered agent is to accept legal
documents and papers on behalf of the LLC. The
registered agent name and address of the registered
agent is a matter of public record and anyone can look
this person up. In most states, the LLC itself cannot be
its own registered agent.
You will need to check the specific
registered agent qualifications for your state as they differ
depending on the state. In most states, if you are a resident of the
state where your LLC is formed and you will be a member of the LLC,
you can serve as the LLC Registered Agent.
Many business owners choose to retain
a registered agent service for this role because they do not want
their name and address publicly registered and available in the
state database (privacy concerns). There are many companies that
provide this service. Make sure you choose an attorney or reputable
registered agent company as they will be responsible for accepting
important papers for your LLC and forwarding them to your LLC's
principal address.
STEP 4:
Determine Ownership of LLC
Who will own the LLC and how much will
each owner own of the LLC? This is a fundamental
determination that should be resolved before you set up
an LLC for your business.
The important step is to make sure you properly document
the issuance of ownership interests in the LLC to the
actual owners (called Members once they become owners of
an LLC).
A newly formed LLC does not automatically have Members
in most cases.
The LLC is its own separate entity and so the entity
needs to issue ownership interests. So, you need to
finalize and document the following:
1. Member Names and Addresses
2. Percentage Ownership Interests
3. How Much Money or Other Property Each Member is
Contributing for his/her Ownership Interest
Once these questions are
agreed upon, the ownership structure needs to be
documented.
This is usually done through the LLC Operating
Agreement.
One of the benefits of a limited liability company is that the Members can
decide how they want Members to be treated and what
rights, obligations and limitations apply to Members.
Accordingly, Operating Agreements can become quite
complex the more an LLC wants to tailor its Membership
rules.
While the decisions of who will be Members in your LLC,
how much they will own and how much they will pay for
their Membership Interests are pretty straightforward,
there may be other Member specific issues that need to
be addressed.
For example, will any
Member be required to contribute more capital to the LLC
in the future? Or, will any Member be required to
contribute services to the LLC as a condition to
obtaining or retaining his/her Membership Interests?
Other issues include what happens when a Member wants to
resign or sell his interests?
Any other Member
arrangements should be documented as well in the
Operating Agreement or another document between the
Members. If there is going to be a services
requirement for any Member, your LLC should also sign an
employment or services provider agreement with that
Member.
This is one area where
legal representation by a qualified attorney is always
recommended. After you set up an LLC with your
state, you should consider seeking help to structure the
ownership of your limited liability company.
STEP 5:
Determine Management Structure for Your LLC
An LLC has two choices for a management
structure: (i) Member-managed and (ii) Manager-managed.
In a Member-managed LLC, the members themselves have
management authority and the obligation to make
management decisions on behalf of the LLC. The Members
will need to approve LLC business decisions and actions.
The Members usually act by taking votes and a certain
percentage vote is required to approve business
decisions and actions. The Members can also delegate
authority to officers of the LLC (President, Secretary,
Treasurer, etc.).
In a Manager-managed LLC, the members themselves are
passive investors in the LLC and have no management or
other authority to act on behalf of the LLC. Instead,
the Members elect managers and the managers make up what
is commonly known as a Board of Managers. The Board of
Managers is the governing body of the LLC and has the
management authority to authorize LLC business decisions
and actions. The Board can also delegate authority to
officers of the LLC. In a small business Manager
managed LLC, the managers are usually some or all of the
Members but a manager does not have to be a Member.
The management structure of an LLC is established in the
LLC Operating Agreement. The LLC Operating Agreement is
the most important document for the LLC. This Agreement
should have specific process provisions addressing how
the Members or the Managers make decisions and call
meetings.
Your should plan on creating and adopting an LLC
Operating Agreement at the beginning of your LLC
business. Without one, there is a high risk of Member
disputes and confusion without one. Even if you are a
single Member LLC, the Operating Agreement is a
necessary agreement to evidence that your LLC is
separate and apart from yourself. This evidence is very
important if anyone were ever to challenge your LLC and
try to hold you personally liable for business lawsuits
and debts.
Without a written Operating Agreement, you will still
need another written document to evidence the issuance
of LLC ownership interests and your management structure
will be based on the management specific provisions of
the state's Limited Liability Company laws.
Operating Agreement Options
If there is one area of an LLC business where an
attorney will have the most value, it is in creating an
LLC Operating Agreement for your business. Make sure you
find an experienced business attorney.
If you are a single
member LLC or all of the Members are close family
members and so there is little risk of disputes among
members or if you want to get a standard Operating
Agreement in place for your LLC, you can purchase a good
Form LLC Operating Agreement or use an
LLC Operating Agreement Preparation Service to
prepare a customized LLC Operating Agreement for your
LLC.
STEP
6: Obtain a Federal Employer Identification Number
Most newly formed LLCs will require a
federal employer identification number (also known as an
EIN# or a TIN#). This number is the number assigned to
your LLC by the Internal Revenue Service (the “IRS”).
Soon after you set up an LLC, your LLC should open a bank account and keep track of
money in their own accounts. Banks will require an EIN#
to open an account for an LLC. If your LLC will have
employees, the EIN# is also used to file payroll returns
and pay payroll taxes to the IRS.
An LLC obtains an EIN# by completing and filing the IRS
Form SS-4 with the IRS. If you want more information
about EIN#s, the IRS has a publication
IRS Publication 1635-Understanding Your EIN-Employer
Identification Number.
If you intend on preparing your LLC’s SS-4 application,
please review the publication and the SS-4 form
instructions thoroughly before applying. The LLC
Expert provides an EIN obtainment service and can take
care of the details if desired.
STEP 7:
Determine Federal Income Tax Structure for your LLC
A great benefit of the limited liability
company is that an LLC
may choose how it will be taxed for federal income tax
purposes.
If your LLC is a single member LLC, the LLC has the
choice of being taxed as (i) a sole proprietorship; (ii)
a C corporation or (iii) an S corporation. Multi-member
LLCs can be taxed as (i) a partnership; (ii) a C
corporation or (iii) an S corporation.
If your LLC is a single member LLC and you want the LLC
to be taxed as a sole proprietorship, you do not need to
make any filings with the IRS. Similarly, the default
rule for multi-member LLCs is partnership taxation, so
no filing is required. If you would like your LLC to be
taxed as either a Corporation or an S Corporation, then
you will need to file a business entity classification
form with the IRS
Before you choose your tax structure, it is advisable
that you consult your accountant because this decision
can have significant economic consequences.
STEP 8:
Register with the State Department of Taxation
In addition to paying federal income taxes to the IRS,
the business generated by your LLC will require the
payment of state income taxes in states which have an
income tax. If your LLC is selling products that are
subject to sales tax, a sales tax license is also
required.
After you set up an LLC with the
state corporation agency, you should visit the website of your
state's department of taxation to learn more about your state's
specific tax registration, filing and payment requirements.
STEP 9:
Obtain Other Required Licenses
Your LLC will need to obtain a business
license in the locality (county or city) where it does
business. Each county and city has different rules,
applications and potential fees for obtaining a business
license. Also, if you plan on using a trade name other
than the name of your LLC, you should register those
names in the locality as well. Call your locality (or
visit their website) to learn more.
Some businesses require an occupational or professional
license in order to operate their business. Examples of
these types of business include lawyers, doctors,
architects, real estate brokerages, engineers, land
surveyors. If your business requires other licenses,
make sure you obtain the licenses and register the LLC
with the relevant state professional regulatory boards
when necessary.
In a limited number of circumstances, there are also
some products that require licensing before they are
sold (for example, lottery tickets, gasoline, or
firearms). Contact the relevant licensing authorities to
determine the licensing requirements of your business.
STEP
10: Employer Registrations
If you plan on hiring employees for your
LLC, your LLC will need to register with the IRS to send
in payroll taxes. Federal employment tax issues can be
complicated and require some time to learn the process.
Here is a link to the relevant page on the IRS website:
http://www.irs.gov/businesses/small/article/0,,id=98858,00.html
Download the employment
guide as a first step.
Your LLC will also need to register with your state's
employment commission or agency. Most of them will have
a handbook guide as a starting point.
Employment registrations
and payroll taxes can get overwhelming. There are
payroll services that can assist your LLC with this
matter.
Some states also have mandatory workers compensation
obligations if you have a certain # of employees.
These rules are also quite complex. Find your states
relevant website or a good workers compensation
insurance provider and they will be able to explain the
specific rules and requirements.
STEP
11: Know There Are Many More Next Steps
Obviously, the first 10 steps noted above
are the minimum steps needed to set up an LLC business.
At this point, there are still a myriad of other
operational and other business matters to take care of.
For example, your LLC will need to open a bank account
and your LLC should also seriously consider whether to
purchase insurance for the business.
This Report is designed to give you the important first
steps. Consider using a reputable and
knowledgeable formation service to take care of the
details to properly set up an LLC in your state.
The LLC Expert offers the fastest turnaround times and a
guaranteed service to
form
an LLC in most states. Learn More:
LLC
Formation Services
