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Setting up an LLC can be one of the most critical steps when making your new business official. An LLC offers many advantages for business owners, from taxes to coverage. Read on to learn how to set up your LLC in seven easy steps.
What is an LLC?
LLC stands for Limited Liability Company and is a structure that is recognized widely in all U.S. states. An LLC has many benefits, including protecting the owner’s personal assets from the company’s debts and liabilities. This entity shares commonalities between a corporation and a sole proprietorship.
An LLC is easier to set up than a corporation and varies from state to state, so be sure to check the guidelines of the state in which your business resides. The formal business arrangement of LLC formation requires articles of organization to be filed with the state, and there is no limit to the number of LLC owners on the formation documents.
What are some advantages of starting an LLC?
There are many advantages of starting an LLC.
- The main advantage is that it provides members with personal liability protection. As mentioned before, this means that the owners listed on the LLC have protection and insurance of their personal financial assets in the event the LLC goes into debt or is sued.
- Another advantage of having an LLC is the tax benefits. LLCs are subject to “pass-through taxation” by default which means that the profits and losses of the LLC will pass through each owner’s tax return and are taxed at the owner’s tax rate, unlike corporations that have to pay federal corporate income tax. For tax purposes, forming LLCs can help business entities navigate both state taxes and federal taxes managed by the IRS (Internal Revenue Service).
- LLCs are generally less expensive to start and maintain. The main cost of setting up an LLC is the filing fees.
Setting up an LLC can be done in seven easy steps, detailed in this step-by-step guide.
Steps to setting up an LLC.
1. Choose a business name.
The business name you choose should follow state requirements and regulations, yet be catchy and easy to market. You will have to research the name you want to determine if it is already taken.
If another business already uses the name you want, you will not be allowed to file under that specific name. Most states also prohibit using certain words in the name of your business, including “insurance” or “banking.”
It can also be a good idea to add “LLC” or “limited liability company” at the end of your business name. You can often find these state laws and regulations on state websites. You can use this website to search for existing LLC names and if the one you want is available.
Opting for a DBA (“Doing Business As”) is an alternative option for conducting business under a different company name. While small businesses can similarly benefit from DBAs, which are legal documents pertaining to trade names, they don’t carry the same business structure or legal benefits as LLCs.
2. Choose a designated registered agent.
As per U.S. regulation, every state requires all LLCs to have a registered agent. A registered agent is someone who receives official legal or illegal documents, including subpoenas, on behalf of your LLC.
Registered agent services will provide these documents to the business owner if needed. Anyone who is at least 18 years old can be a registered agent. You can name yourself, the business owner, the registered agent, or an employee.
The registered agent’s requirement is that they must have an available address within the state of the business. You can also designate a company to be a registered agent, which will come with a fee. Typically, registered agent fees out of a company cost more than one hundred dollars per year.
3. Obtain a copy of your state’s LLC Articles of Organization form.
To establish your LLC as a legal entity, you must file an Article of Organization form with the state where you plan to register your business. Some states may call this form a different name, but it is most commonly known as the articles of organization form.
You can obtain this form by searching for a free form within your state. You can find an example of this form on this website.
4. Prepare the LLC’s Articles of Organization form.
As mentioned, each state will have its regulations for the articles of organization form, so be sure to find the correct form for your state before filing.
Some basic information that you will need to prepare before filing out the form would be:
- Your legal business name
- The address of the principal place of your business
- The purpose of your business
- The way your LLC will be managed
- Contact information for your designated registered agent
- A Federal Employer Identification Number (which functions as the Social Security number for your business) for employment tax and business tax purposes
Once you have this information, be sure that all business owners with your company sign the form.
Some states, including Nebraska and New York, require the business owner to publish an official notice in a newspaper indicating their desire to register their LLC. These states require this step before filing your articles of organization.
5. File the Articles of Organization.
Once you have filled out the articles or organization and determined if you need to submit a notice with a newspaper, you can file articles of organization and pay the required filing fee. Usually, this filing requires your state’s Secretary of State.
When all of your documents are approved by the state, you will receive an issued certificate indicating that your LLC is officially registered and in compliance.
6. Optional: Create an operating agreement.
An operating agreement can be a great benefit to member-managed LLCs that have multiple owners. This agreement contains the financial, legal, and management rights of all members whose names are on the registered LLC.
Most states do not require an operating agreement which makes it completely optional but is suggested for those with multiple owners. This can also be an option for solo business owners, as it can be a good thing to have all details of the LLC written out.
You can easily find free templates of operating agreements online or a sample template found here.
7. Keep your LLC up to date and active.
When setting up your LLC with the above steps, it is also important to remember to keep it active, up to date, and within compliance as regulated by the state. It is vital to refer to your business’s state filing website to ensure that it remains in good standing.
This can include renewing business licenses, filing annual reports, and maintaining a business bank account or credit card. Depending on your state, you may have to update your LLC information yearly or pay an annual state fee.
Options after you have set up your LLC.
After you have set up your LLC in the state that it is registered in, you have the option to register to do business in other states. You may need to submit paperwork similar to that you filed when initially registering your business.
Remember that you will need your own registered agent in each state you decide to register in.
You may also be able to set up a foreign LLC. Depending on the type of business you run and which professional services you offer. However, a small-business owner in Florida running a bakery under a single-member LLC likely won’t have to worry about international concerns.
The bottom line.
Deciding to start an LLC can be extremely daunting and exciting at the same time. Setting up the LLC is one of the most critical elements to starting up and can also provide benefits such as protection to business owners and tax breaks.
It is essential to research your state’s specific guidelines and requirements before filing to make sure that everything is in order.
We know that starting a new business can be overwhelming, and there can be steps that you overlook. Looking for more resources as you set up your LLC? Explore Entrepreneur.com’s wealth of business and professional articles.