Start an LLC
A limited liability company (LLC) is a popular way of setting of a business because it allows the owners to limit their personal liability for actions taken by the company. While an accountant or an attorney can set up an LLC for you, it is usually pretty easy to complete the formation process yourself. Keep in mind that each state will have different rules for forming an LLC, so it is important to look at your specific state laws before proceeding.
Naming Your LLC
- Find your state’s LLC laws. The name that you choose for your LLC must comply with your state’s laws. While there will be variation, most states do not allow LLC names that are duplicates of existing business names or extremely similar to an existing name. States also may have other restrictions on the type of name you can choose.
- For example, in Texas, an LLC name cannot include profanity language that is obscene in nature (such as explicit sexual language).
- To search for your state’s laws regarding LLC formation, visit http://www.nolo.com/legal-encyclopedia/form-llc-how-to-organize-llc-30287.html/ and choose your state.
- Choose a unique name for your LLC. Choose a name that complies with your state laws and properly represents your business. While there is no exact formula for choosing the best name, you should choose something that is:
- easy to remember,
- easily spelled and pronounced,
- suggests the items or services that you sell, and
- distinguishes you from your competitors.
- Include "LLC" or some variation in your name. Most states require you to include, as part of your company's name, the letters "LLC," "L.L.C.," or "Limited Liability Company."
- Even after you create your company's name, do not omit these identifying letters on marketing materials, advertisements, or business transactions. Doing so may lead to unintended consequences. For example, if you leave "LLC" out of your name while doing business, a judge may find that you entered into a business deal as an individual, and not as an LLC. If this happens, you may be found personally liable and may not receive the limited liability shield you anticipated.
- Ensure that your chosen name is available. In order to register your LLC with the name you’ve chosen, you must search to make sure that the name is available in the state where you plan to file your LLC. To check name availability, you must look through the secretary of state’s database of registered names.
- Most states have an online database that you can use to search for a small fee.
- Additionally, some states will allow you to reserve a name for a short period of time before registration so no one else takes your name while you are deciding whether to use it.
- Reserve your business name. In some states, you can register your business name when filing your articles of incorporation. However, in other states, you must separately register your name before forming your LLC.
- For example, each business that wants to operate in Texas must register its name separately from the articles of incorporation.
- Some states will charge a fee for name registration.
- To find out the specific requirements for your state, visit your secretary of state’s website.
- Decide whether to trademark your name. If your name is very original or creative, you also may want to consider registering it as a trademark. This can distinguish your product or service from those of competitors. Trademarking your company name also can protect you from trademark infringement by other companies.
- For example, a trademark will allow you to hold a domain as yours, as well as any other intellectual property related to your business.
- You can trademark your business name through the U.S. Patent and Trademark office by visiting their website at http://www.uspto.gov/ and filling out the form.
- The fee to trademark a business name is between $275 and $325.
Setting up Your LLC
- Decide how your LLC will be managed. When you set up your LLC, you will be able to choose who will run your company and how it will be run. In general, you will be able to pick between two options:
- The member-managed LLC, where all the owners participate in running the business.
This is the most commonly utilized structure, in large part because most LLCs are small businesses without a need for separate management.
- In most states, this is the default structure. Therefore, if you fail to designate a structure for your LLC, most states will automatically create a member-managed LLC.
- If you choose this structure and only have one member (a.k.a., manager), in some states you will not even have to file articles of organization. Check your state laws for more details.
- The manager-managed LLC, where only designated members (or even outsiders) are given the responsibility of running the LLC. While this is a less common structure than the member-managed LLC, it can be useful when some members only want to be passive investors. In addition, this structure may be advantageous if you have some members that are not particularly skilled in managing, or when your ownership is too large or diverse to allow for everyone to manage.
- The member-managed LLC, where all the owners participate in running the business.
- File your “Articles of Incorporation.” To form your LLC, you must prepare and file "articles of organization" with the secretary of state in the state where you plan to do business. While most states use the term "articles of organization" to refer to the basic document required to create an LLC, some states call it a "certificate of formation" or "certificate of organization."
- Generally, you will be required to include your LLC name, legal address, business purpose, names of members and general business structure in your articles of incorporation.
- At the time you register, you will also have to pay a fee. The amount of the fee will vary between states, but it is typically between $100 and $300.
- Choose a registered agent. In addition to filing the articles of incorporation, you will also need to choose someone to be the LLC’s “registered agent” for service of process. In most states, the registered agent can be either a domestic entity or a foreign entity that is registered to do business in the state or an individual resident of the state. Typically, one of the partners of the LLC will act as the agent .
- Keep in mind that the LLC itself cannot act as its own registered agent; so do not enter the limited liability company name as the name of the registered agent.
- Obtain an required business licenses. License requirements will vary according to your state, or even according to the county where you plan to do business. Contact your county clerk's office to determine if any licenses or permits are required for your type of business.
- For example, if you are opening a restaurant, you must have the applicable licenses from the health department.
- The city Chamber of Commerce may also have information on what type of licenses you need, how to apply for them, and what the fees will be.
- Additionally, some licenses may be obtained and renewed online.
- Apply for an employee identification number (EIN). An EIN is an assigned number for IRS purposes, similar to a social security number. EINs are used for small business and corporations to account for employee tax withholdings.
However, an EIN is not required if you do not have any employees and you are a solo member LLC. If this is the case, you can simply use your Social Security number instead. Another option, aside from hiring employees and applying for an EIN, is to hire only independent contractors. Independent contractors are not considered employees and therefore no EIN will be required. If you do plan on hiring employees, you can apply for an EIN by:
- Contacting the Internal Revenue Service at www.irs.gov. Click on "Apply for an EIN online" in the left corner.
- Reading the guidelines and click on "apply now."
- You will need the following information to apply for an EIN: the name of your LLC, the name and social security number of the owner or managing member of the LLC, the business address, the country of incorporation (United States or a foreign country), the number of members in the LLC, and information about what types of services your business supplies.
- There is no charge for the application if you go directly through the IRS.
- Open a bank account for your LLC. You will need to have your EIN prior to opening an account. Consult your bank of choice about the options on your account that will be best suited to your business needs.
- Ask the bank if you will need to present certain documentation to open the account, such as your certificate of formation or business license. Banks in Texas may vary in terms of what they require for opening an account.
Writing an LLC Operating Agreement
- Protect your LLC by writing an operating agreement. Unless you are a solo member LLC, in which case you do not need an operating agreement, it may be wise to write one in order to protect your LLC. Although most states do not require you to register an operating agreement, you may want to consider doing so. In almost all cases, you can choose the operational rules for your LLC. However, if you do not have an operating agreement, the “default” rules in place in your state will govern in the event of a disagreement.
Your operating agreement can help you do the following:
- Protect your LLC status: Having an operating agreement makes your LLC more “legitimate” in the eyes of the court, especially if it is a solely owned LLC. Because there are many different types of business structures, you want to make sure that your LLC is recognized as an LLC and not something different. The formality of an operating agreement insures that your LLC will be seen as an LLC.
- Define your management and financial structure: the operating agreement should define how your LLC is going to be run and how the finances will work - including who will share in the profits and what will happen in the event of a disagreement. If you do not have an operating agreement, you and your partners will have a much more difficult time resolving financial or management disagreements.
- Override state default rules: each state has laws that automatically govern LLCs in that state unless an operating agreement says otherwise. However, these default rules do not always fit your situation. Therefore, you should write an operating agreement that sets your specific rules for the inner workings of your LLC.
- Decide what to include in your operating agreement. Each LLC’s needs will be different and therefore, no two operating agreements will look exactly alike. In most cases, you should contact an experienced attorney to draft your operating agreement. However, most operating agreements should include the following basic items:
- how much each member of the LLC owns. For example, if you have three LLC members and each member as a 33% interest in the LLC, you should include that figure in the operating agreement.
- the members' rights and responsibilities regarding the LLC. Set out what each LLC member is required to do to contribute to the LLC, and the benefits that each member will receive.
- how the LLC will vote, including the type of voting structure used and the number of votes (or percentage of votes) given to each member.
- how profits and losses will be allocated to the LLC and among the members.
- how the LLC will be managed.
- rules for holding annual meetings and voting on important matters.
- rules regarding a member’s buyout, or buy-sell, provisions, which determine what happens when a member wants to sell his interest or otherwise cannot hold it (due to death or disability).
- Find resources. Depending on the structure and size of your LLC, writing an operating agreement can be difficult. As mentioned above, you should hire an attorney to look over your document for best results. However, your state may have other resources for LLC members, such as form operating agreements or copies of the default rules.
- Look on your secretary of state’s website to determine what resources may be available to you.
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